- President appears before European Parliament lawmakers
- Nowotny said earlier he's wary of expanding bond-buying plan
Mario Draghi said it’s too soon to say whether risks to the economic outlook warrant a step-up in the European Central Bank’s stimulus.
“More time is needed to determine in particular whether the loss of growth momentum in emerging markets is of a temporary or permanent nature,” the ECB president said in his quarterly testimony to European Parliament lawmakers in Brussels on Wednesday. Officials need to “assess the driving forces behind the drop in the international price of commodities and behind the recent episodes of severe financial turbulence,” he said.
While ECB policy makers have repeatedly said the central bank is willing to bolster its bond-buying program if necessary, some officials are reluctant to rush in. Draghi’s comments echo sentiment expressed by Governing Council members Ewald Nowotny and Bostjan Jazbec, who both said earlier Wednesday that it’s too early to judge whether expanding purchases would be appropriate.
Financial markets and commodity prices have tumbled as China’s slowdown threatens global growth. A muddied outlook prompted the Frankfurt-based central bank to downgrade its forecasts for growth and inflation earlier this month, sparking investor speculation that more stimulus was on the way.
The ECB now foresees consumer-price growth of 1.1 percent in 2016 and 1.7 percent in 2017. That compares with its medium-term goal of just under 2 percent. Inflation was 0.2 percent in August.
“Should some of the downward risks weaken the inflation outlook over the medium term more fundamentally than we project at present, we would not hesitate to act,” Draghi told the lawmakers. “The gravity of the challenges right now would demand that we use all available instruments within our common knowledge.”
The euro strengthened 0.2 percent to $1.1145 at 5 p.m. Brussels time.
“In terms of timing, the comments from the ECB president tend to put the pressure on the December meeting when new macro/inflation forecasts will be released,” said Frederic Pretet, a Paris-based strategist at Scotiabank. “No surprise, next inflation reports will be key.”
The question of whether more quantitative easing is needed “deserves a much more thorough examination,” Nowotny said in a Bloomberg Television interview in Vienna. “Monetary policy should be a steady-hand policy. We shouldn’t act in a too-active way.” Jazbec told reporters in Ljubljana that monetary stimulus works with a delay and “it’s too early to talk about any new policies.”
The euro-area economy probably maintained its 0.4 percent rate of expansion in the third quarter and will continue to grow amid rising orders and backlogs of work, London-based Markit Economics said in a report on Wednesday, based on a survey of purchasing managers.
Draghi acknowledged the recent data, saying credit markets strengthen the impression that the upturn is improving and that “it shows our policies are actually working.” He said the inflation rate would start rising again toward the end of the year.
Even so, the uncertain world outlook prompted the U.S. Federal Reserve this month to wait before making its first interest-rate increase since the financial crisis. Fed Chair Janet Yellen may elaborate on that decision on Thursday when she speaks in Amherst, Massachusetts.
ECB Executive Board member Peter Praet said in Dublin on Wednesday that “monetary policy will play its part for as long as needed, which means the full implementation of the asset purchase program and, if necessary, adjustments to its size, composition and duration.”
The central bank currently intends to buy an average of 60 billion euros ($67 billion) a month of public and private-sector debt through September next year.
In his comments to the European Parliament, Draghi also said that governments must push through structural reforms and, while they should stick to existing pledges to reduce their debt burdens, they should use any room for maneuver.
“The best way for countries to repay debt is to grow out of debt, to undertake all the actions that would enhance growth,” he said.
Draghi reiterated a call for stronger European institutions and a “political center” to support the single currency, such as a euro-area treasury. He said a capital markets union must be established to improve cross-border risk-sharing, and the nascent banking union should be completed as soon as possible.
“We need to prevent imbalances, whatever their nature, from developing into a crisis environment,” he said. “Confidence is also based on trust that what’s been committed will actually be undertaken, namely banking union being undertaken without waiting for big treaty changes.”