Draghi Says ECB's Exit Strategy Timing Affected by Inflationary Pressures
Italy's Central Bank Governor Mario Draghi
SeongJoon Cho/Bloomberg
Italy's Central Bank Governor Mario Draghi.
Italy's Central Bank Governor Mario Draghi. Photographer: SeongJoon Cho/Bloomberg
Feb. 24 (Bloomberg) -- Daniel Fuss, vice chairman at Loomis Sayles & Co., and Edward Altman, a professor of finance at New York University's Stern School of Business, talk about the outlook for U.S. and European debt markets. They speak with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)
European Central Bank Governing Council member Mario Draghi said that inflation pressures are forcing policy makers to focus more closely on the timing of future interest rate increases.
“The appearance of inflationary tensions does require that we carefully assess the timing and methods for restoring normal monetary conditions and interest rates,” he said in a speech in Verona, Italy, today. “Monetary policy must prevent a deterioration of expectations, in order to keep the stimulus of international prices from passing through to domestic prices and wages in the longer term.”
Draghi, a possible successor to ECB President Jean-Claude Trichet later this year, is the latest official to underscore the dangers of accelerating inflation. Federal Reserve Vice Chairman Janet Yellen and ECB Vice President Vitor Constancio, speaking in New York yesterday, both said they would act to prevent any surge in inflation sparked by rising oil prices.
The European Central Bank, which has kept its benchmark interest rate at a record low of 1 percent for almost two years, is growing more concerned that soaring energy and food prices will drive up wages and entrench faster inflation. At the same time, raising borrowing costs too soon could exacerbate Europe’s sovereign debt crisis by increasing pressure on stressed banking systems in countries such as Greece and Ireland.
Rates and Growth
“Real short-term interest rates that are markedly negative, as they have been over the past two years, have not improved the growth prospects of the less dynamic economies,” Draghi said in the speech to foreign-currency traders. “As economic policies reach the end of their expansionary phase, this will not necessarily endanger growth.”
In their remarks, Yellen and Constancio didn’t say whether they’ll back swift action to control prices as Muammar Qaddafi struggles to retain power in Libya, Africa’s third-biggest oil producer. The Fed and ECB diverged in their response to rising oil prices in 2008, with European officials raising their benchmark interest rate and the Americans holding off.
Crude oil rose 14 percent this week in its biggest weekly gain in two years on concern the turmoil that has cut Libya’s output may spread to other parts of the region. Futures in New York surged to a 29-month intraday high. Crude oil for April delivery climbed 60 cents, or 0.6 percent, to settle at $97.88 a barrel on the New York Mercantile Exchange yesterday.
African Turmoil
Inflation in the euro region quickened to 2.4 percent from 2.2 percent in December, more than economists forecast and the fastest since October 2008. Core inflation, which excludes food and energy prices, rose 1.1 percent. January consumer-price data for the euro region will be released on Feb. 28.
Draghi said political turmoil in North Africa “may undermine investment in the oil industry and raise energy prices, with repercussions for world growth,” even as spare capacity in other producer nations will make up for any lost energy output in countries such as Libya. He said he sees global gross domestic product expanding 5 percent this year.
In Italy, a 20 percent increase in oil prices will shave half a percentage point off growth over three years, Bank of Italy Governor Draghi said in his first major address since becoming a favorite to succeed Trichet at the ECB’s helm after Bundesbank President Axel Weber unexpectedly pulled out of the race on Feb. 11.
Draghi, who also heads the Financial Stability Board that’s seeking to rewrite global financial rules, called on Italian banks to reinvest profit to prepare for the new capital rules.
“We expect that as in 2009, a large part of last year’s profits will be allocated to increasing the banks’ capital,” he said. Still, “recourse to the capital market would also appear unavoidable as soon as conditions permit.”
To contact the reporter on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net
To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net
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