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Draghi sees ‘common sense’ keeping eurozone afloat
FRANKFURT AM MAIN, Oct 26, 2018 (BSS/AFP) – European Central Bank
President Mario Draghi played down Thursday an Italian budget clash with
Brussels and confirmed the institution’s plan to end crisis-fighting
stimulus, seeing no need to respond to heightened risks threatening the
eurozone.
“I’m still confident an agreement will be found” after the European
Commission asked Rome to alter its annual budget to respect EU rules, Draghi
said as he was peppered with questions on Italy.
“Common sense… will lead parties to converge to some sort of agreement,”
he added.
Highly-indebted Italy’s plan to swell deficits to fund higher spending on
handouts is just one of the threats to the eurozone’s long post-financial
crisis recovery.
Journalists pressed Draghi with a familiar litany of dangers, from growing
protectionist trade policies to the rising risk of a no-deal Brexit, weakened
emerging market economies or financial market volatility.
Forward-looking indicators like surveys of business confidence have also
clouded over since the central bankers’ last meeting in September.
“Yes there is weaker momentum, yes there are some weaker survey data
coming out, but is this enough of a change to make us change the baseline
scenario? The answer is no,” Draghi said.
He confirmed plans to end “quantitative easing” (QE) or mass bond-buying
at the end of December.
But he also reiterated that the ECB will keep interest rates at historic
lows until late next year to support growth and encourage inflation towards
its goal of just below 2.0 percent.
“The ECB remains highly determined to bring net asset purchases to an end”
commented ING Diba bank economist Carsten Brzeski.
“It would require a severe downturn of the economy, not only weaker
momentum, in the coming six weeks for the ECB to alter its course.”
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– QE end in sight-
Buoyed by internal forecasts showing inflation at 1.7 percent between this
year and 2020, policymakers have taken gradual steps towards ending QE.
Launched in March 2015, the purchases of government and corporate bonds
are designed to pump cash through the financial system to firms and
households, powering growth and, in turn, inflation.
After slowly reducing QE, the ECB most recently halved bond-buying to 15
billion euros ($17 billion) per month between October and the December cut-
off.
Meanwhile, the central bank will keep credit flowing by leaving interest
rates at historic lows “at least through the summer of 2019” and possibly
beyond — leaving it well behind the US Federal Reserve, which is gradually
raising rates.
In another tool in the ECB’s box, some of the easy-money effect of QE will
be preserved for the long term as the central bank reinvests the proceeds
from its 2.5-trillion-euro stock of bonds.
Draghi offered no details about the rollover programme, saying he and the
other governing council members would tackle it in December.
The euro slid 0.35 percent against the dollar following Draghi’s comments,
to $1.1376.
– ‘Balanced’ risks –
The ECB chief argued that “country-specific” factors were behind much of a
growth slowdown in recent months, such as more comprehensive new emissions
tests slowing eurozone powerhouse Germany’s mighty car industry.
More broadly, “it’s simply that we’re having growth returning to potential
after a 2017 where it was clearly above potential,” he said.
“Risks relating to protectionism, vulnerabilities in emerging markets and
financial market volatility remain prominent,” Draghi allowed.
But he pointed to “very comforting” economic fundamentals that should keep
growth and inflation reliably ticking along.
Workers are enjoying “quite significant” pay rises in some countries as
the number of unemployed shrinks, the ECB chief noted, while companies are
approaching the limits of their productive capacity “in most countries” using
the euro.
He acknowledged that the US’ trade war with China has had some knock-on
effect in Europe and that an acrimonious British departure from the EU would
threaten disruption to trade and to financial markets.
But turmoil in emerging markets like Turkey — a big trading partner for
some eurozone economies — “seems to have stabilised somehow” since
September, Draghi said.
And as in the Brussels-Rome row, he said he was “confident that a good,
common-sense solution” would defuse Brexit.
Overall, “risks surrounding the euro area growth outlook can still be
assessed as broadly balanced,” he judged.
BSS/AFP/HR/1005