Draghi Says Inflation Weakening as December Decision Nears

Mario Draghi Dovish on European Economy
  • Signs of turnaround in core inflation also fading, Draghi says
  • ECB has pledged to boost monetary stimulus if mandate at risk

Mario Draghi signaled that the European Central Bank is ready to boost its stimulus programs next month as inflation wanes and economic prospects worsen.

“Signs of a sustained turnaround in core inflation have somewhat weakened,” the ECB president told a hearing in the European Parliament in Brussels on Thursday. “Downside risks stemming from global growth and trade are clearly visible.”

QuickTake Deflation

The euro fell almost half a cent as Draghi began his remarks and was 0.2 percent lower at $1.0717 at 1:49 p.m. in Frankfurt. The odds that the ECB will cut its deposit rate in December climbed to 100 percent from about 88 percent before the speech, ECB-dated Eonia forwards showed.

Officials are tussling over whether more action will be needed as soon as the next policy meeting on Dec. 3. While Draghi hinted at a near-certain move after the last meeting in October, several national governors have since said they see little cause for action.

Judgment Call

The Frankfurt-based ECB is facing a complex judgment call on whether its public-sector asset-purchase plan, started in March this year, will be enough to counter disinflationary pressures. Euro-area gross domestic product for the third quarter will give an indication of how those measures are working. The report, due for release at 11 a.m. in Luxembourg on Friday, is forecast to show the economy expanded 0.4 percent, matching the pace of the second quarter.

Data on Thursday showed industrial production in the euro area fell 0.3 percent in September, more than economists had forecast. The decline follows a 0.4 percent drop in August, which was the biggest in five months.

With increasing signs that the global outlook is damping price pressures in the euro area, should officials “conclude that our medium-term price-stability objective is at risk, we would act by using all the instruments available within our mandate to ensure that an appropriate degree of monetary accommodation is maintained,” Draghi said.

Inflation was zero in October, at odds with the central bank’s goal of keeping increases just below 2 percent. ECB Executive Board member Benoit Coeure said in an interview published Wednesday that expectations of price gains are not rising. Draghi has consistently said the current quantitative-easing program could be ramped up by size, duration, or type of assets. On Thursday, he said that “it’s our duty to fulfill our mandate.”

Policy Tussle

On the upside, the ECB president said that the economy “has shown some degree of resilience in the face of external influences that tend to weaken demand,” adding that “the lower cost of energy and our monetary policy measures are supporting consumption and, increasingly, new capital formation.”

Still, Draghi has taken a more pessimistic view of the balance of risks to the economy than some of his colleagues on the Governing Council. Ardo Hansson, Governor of Estonia’s central bank and a former World Bank economist, led calls in recent days to hold off on adding further stimulus for now.

New ECB economic forecasts, due to be released in December, may provide the basis for a policy decision. Draghi signaled the path of inflation has worsened since the central bank started its asset-purchase plan.

“The protracted economic weakness of the past years continues to weigh on nominal wage growth, and this could moderate price pressures as we move forward,” he said. “From today’s perspective, this suggests that a sustained normalization of inflation could take longer than we anticipated in March when we first appraised the overall impact of our measures.”

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