Draghi Says ECB Needs Patience as Inflation Stays Subdued

  • ECB kept interest rates unchanged, removed reference to cuts
  • Officials lower forecast for inflation, raise growth outlook

European Central Bank President Mario Draghi said that risks to euro-area growth are 'broadly balanced' -- an upgrade from the ECB's previous assessment. He made the comments during a news conference following the Governing Council meeting in Tallinn, Estonia. (Source: Bloomberg)

Mario Draghi said the euro region still isn’t generating enough inflation, overshadowing improved prospects for the economy that led officials to upgrade their growth assessment.

“The risks around the growth outlook are considered to be broadly balanced,” the European Central Bank president told reporters at a news conference after a monetary policy meeting in Tallinn. “At the same time, the economic expansion has yet to translate into stronger inflation dynamics. So far, measures of underlying inflation continue to remain subdued. Therefore, a very substantial degree of monetary accommodation is still needed.”

The change in the assessment of risks for the economy sets the scene for the ECB to start a discussion about the timing for the removal of the stimulus, though the tone of Draghi’s appearance suggests officials aren’t yet ready for such a debate. That chimes with comments in the run-up to the meeting that policy makers must be extremely cautious in communicating amid a lack of convincing inflationary pressure.

“We need to be patient,” Draghi said. “We need to continue to accompany the recovery with our monetary policy.”

Draghi said he didn’t hear any “dissenting voice” to proposals that were put forward at the meeting and that tapering of the central bank’s asset-purchase program was not discussed on Thursday.

He said that the ECB removed its easing bias to reflect the fact that the risk of deflation has disappeared and said policy makers were becoming “more confident” that inflation will converge toward its objective in a durable way. At the same time, he stressed the central bank needs to be persistent and help the economy achieve full recovery.

“It’s still a very dovish tone -- Draghi doesn’t see this as preparation for a tapering scenario,” Anatoli Annenkov, senior economist at Societe Generale in London. “We’re still very far off from that point.”

The euro weakened 0.5 percent to trade at $1.1201 as of 4:14 p.m. in Frankfurt.

The ECB cut its inflation outlook for each year through 2019 because of weaker energy costs, while raising its forecasts for economic growth. Officials now see inflation at 1.6 percent in 2019, down from a March projection for 1.7 percent. They increased their view for expansion by a 10th of a percentage point annually.

Draghi said that the underlying inflation was “basically the same” and nothing substantial has happened. The central bank needed “stronger confidence” that price growth will hold at its goal of just below 2 percent.

“We have to be confident that the inflation rate is durably converging toward our objective and that it’s a self-sustained convergence,” Draghi said. As the recovery strengthens and unemployment fall further, “the more confident we become that the convergence is on its way to actually satisfy the conditions.”

Earlier, the ECB changed its forward guidance on interest rates, omitting language that previously suggested officials were prepared to cut them again if needed.

“We remove the interest rate bias because the tail risk on future path of inflation had disappeared,” Draghi said. “Deflation risks have definitely gone away.”

At the same time, he stressed the ECB was still ready to ramp up its asset purchases if situation were to worsen. He said there was no discussion at the meeting about normalization of the policy despite “one or two” Governing Council members expressing the view that it should.

Draghi spoke on the same day that the European Union’s statistics office said the euro-area economy grew faster at the start of the year than previously estimated, driven by domestic demand. Gross domestic product in the currency bloc rose 0.6 percent in three months through March, revised up from 0.5 percent.

The change could lift 2017 growth to 2 percent, Draghi said, higher than the official forecast presented at the start of the press conference for 1.9 percent expansion this year.

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