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Draghi Says Investors See First ECB Rate Increase by 2017

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Draghi Says Investors See First ECB Rate Increase by 2017

Mario Draghi said investors predict the European Central Bank will start increasing interest rates by 2017 as he pledged to expand stimulus measures if needed.

“When we look at market expectations, the first hike in interest rates is foreseen by 2017,” the ECB president said in a speech at the Brookings Institution in Washington today. “The Governing Council has repeated many times, even as it was adopting new measures: it is unanimous in its commitment to take additional unconventional measures to address the risks of a too-prolonged period of low inflation.”

The ECB has introduced measures from negative interest rates and long-term loans to asset purchases to fend off deflation and rekindle growth in the 18-nation region. Draghi, in Washington for the annual meetings of the International Monetary Fund and World Bank, has also stressed that monetary policy will fail if European governments drag their feet on structural reforms and reiterated that message today.

“I am uncertain there will be very good times ahead if we do not reform now,” he said. “While stabilization policies that raise output toward potential are necessary, they are not enough. We need to urgently raise that potential. And that means reform.”

Draghi has said he intends to steer the size of the ECB’s balance sheet back to the levels seen at the start of 2012, indicating an increase in assets of as much as 1 trillion euros ($1.3 trillion). Officials will start buying covered bonds this month and asset-backed securities this quarter, and Draghi said today that the program could be expanded to other assets.

Growth Outlook

“We’re moving into more active control of our balance sheet,” he said. “We are ready to alter the size and/or the composition of our unconventional interventions, and therefore of our balance sheet, as required.”

The euro-area economy stagnated in the second quarter and the ECB predicts only a modest expansion through the end of the year. Inflation isn’t seen returning to its goal of just under 2 percent before 2017.

The IMF cut its growth forecasts for the region this year and next, predicting expansions of 0.8 percent and 1.3 percent, respectively, and again urged the ECB to consider buying government debt to fend off deflation. The fund sees inflation accelerating from 0.5 percent in 2014 to 0.9 percent in 2015.

Draghi said the ECB has “acted aggressively” to ease the stance of monetary policy and repair the transmission channel to the real economy, and expects credit to pick up “soon next year.”

On structural reforms by governments, he said he is “optimistic that they will do the right thing” while stressing that they should “exploit the available fiscal space” in European Union rules where they can.