Draghi Vexed by Feeble Reforms as Inflation Remains Weak

Draghi Speaks on Inflation, Rates: Full News Conference
  • ECB keeps forecast for inflation to average just 1.6% in 2018
  • President says ECB to act as needed, governments must do more

Mario Draghi unveiled largely unchanged inflation forecasts for the euro zone even as the European Central Bank’s latest stimulus measures start to take effect, and said sluggish efforts by governments to upgrade their economies are making his task harder.

“We should carry out the right monetary policy according to our mandate regardless of whether structural reforms are put in place,” the ECB president told reporters in Vienna in Thursday, after the Governing Council kept its stimulus program unaltered. “If structural reforms are in place, the time it takes to reach this objective is shorter.”

Aside from a small increase to this year’s outlook, the inflation forecasts matched those from March, including a 1.6 percent prediction for 2018 that is still short of the goal of just under 2 percent. While this was the first time in a year that the ECB hasn’t cut its consumer-price projections, the failure to lift them significantly is worrisome as the previous forecasts didn’t incorporate the effect of an enlarged stimulus program.

“He chose a dovish tilt,” Oppenheimer Portfolio Manager Alessio de Longis said on Bloomberg Television. “He struck a very fine balance but to me the balance is slightly more dovish than I expected.”

Balance of Risks

The euro fluctuated as Draghi spoke. It briefly rose when he said that “the balance of risks has improved on the back of the monetary policy measures taken and the stimulus still in the pipeline.” He later said that shift in risk was “not dramatic.”

The single currency was down 0.1 percent on the day at $1.1175 at 4:24 p.m. Vienna time.

While officials revised up growth forecasts for this year to 1.6 percent from 1.4 percent, they left the estimate for 2017 unchanged at 1.7 percent and cut 2018 to 1.7 percent from 1.8 percent. As well as a “sluggish pace” of reform implementation, Draghi said downside risks to the outlook included subdued prospects in emerging markets and balance-sheet adjustments.

He also cited the U.K.’s June 23 referendum on whether to remain in the European Union. Draghi said his institution’s view is that the country should stay in the bloc.

Three-Pronged

The ECB chief’s concern over too-slow government action echoes a rising chorus of officials and global economic policy advisers warning that central banks are becoming overburdened. The Organisation for Economic Cooperation and Development lambasted rich-world nations this week for failing to overhaul their economies. The International Monetary Fund has called for a three-pronged approach of loose monetary policy, fiscal action and structural reforms to sustain global growth.

“As emphasized repeatedly by the Governing Council, and as strongly echoed in both European and international policy discussions, in order to reap the full benefits from our monetary policy measures, other policy areas must contribute much more decisively, both at the national and at the European levels,” Draghi said. “It is crucial to ensure that the very low inflation environment doesn’t become entrenched.”

The Governing Council earlier maintained its main refinancing rate at zero and the deposit rate at minus 0.4 percent. A corporate-bond purchase program, part of quantitative easing and a sign that the central bank is being forced to reach into ever more assets as it tries to hit its mandate, will start on June 8.

No Change At the ECB, Draghi Ready To Act If Needed

No Waiver

Draghi confirmed that ECB will keep buying 80 billion euros ($90 billion) a month of assets under QE until at least March 2017. Most economists surveyed by Bloomberg say it will probably extend the measure past that date. A new program of four-year loans to banks will begin on June 22.

The Governing Council didn’t take a decision on whether to restore a waiver on Greek debt that would allow the nation’s banks access to access normal refinancing operations instead of relying on emergency liquidity assistance. Draghi said that will require more progress in euro-area aid talks and another monetary-policy meeting.

Asked whether the ECB risks running out of assets to buy under a QE program that is set to total at least 1.74 trillion euros, he said policy makers aren’t currently seeing any difficulty making purchases.

“But if we were to see limits, the design of the program contains enough flexibility that we can adjust the program so that it will meet the desired size,” he said, adding that the ECB is determined to restore price stability without undue delay. “It is quite clear that we would not hesitate to act.”

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