Mario Draghi tweaked the European Central Bank’s policy language to show that the economic risks to the euro area are starting to recede, even while insisting that monetary stimulus must continue. The single currency rose.
The ECB president said the cyclical recovery may be gaining momentum after almost four years of uninterrupted growth, and that policy makers considered removing a key phrase in their forward guidance on interest rates. He also said the balance of risks to growth has improved, and dropped a pledge to use “all instruments” within the central bank’s mandate if necessary.
“That’s been removed to signal that there is no longer that sense of urgency in taking further actions,” Draghi told reporters in Frankfurt on Thursday after the Governing Council agreed to keep its bond-buying program in place until at least the end of the year. “The risks surrounding the euro-area economic outlook have become less pronounced but remain tilted to the downside, and relate predominantly to global factors.”
Exactly two years after the ECB started buying euro-area government bonds, Draghi’s comments suggest that officials may be slowly moving toward a discussion about how to taper quantitative easing and start to raise rates. His remark that the Governing Council had a “cursory” debate about removing wording that rates could still be cut sent the euro up as much as 0.7 percent against the dollar.
The single currency was 0.4 percent higher at $1.059 at 4:13 p.m. Frankfurt time. German bond yields also gained.
Draghi said the ECB’s stance that rates are expected to remain at “present or lower levels” for an extended period are just that — an expectation.
“The probability of an expectation that it will actually materialize into lower level has gone down, given what I’ve just said about the rest, about the progress we’ve made,” he said. “But the Governing Council has decided to keep this forward guidance exactly as it stood before.”
The ECB chief unveiled fresh inflation forecasts supporting his case that stimulus is still needed. While the projection for this year was raised to 1.7 percent from 1.3 percent, price growth will then stay at about those levels — and below the goal of just-under 2 percent — for the following two years. The outlook for 2018 was increased to 1.6 percent from 1.5 percent, and the rate for 2019 was kept unchanged at 1.7 percent. The figures were reported earlier by Bloomberg.
Consumer-price growth that accelerated to 2 percent last month has spurred calls, largely in Germany, for QE to be reined in and rates increased. Before the decision, German Finance Minister Wolfgang Schaeuble called for a “timely entry into the exit” from stimulus policies. Some market indicators point to the possibility of a rate hike in 2018 and BNP Paribas has predicted the deposit rate will be increased this September.
Draghi declined to speculate on whether rates could be hiked before QE ends, and said there was no discussion on whether to to signal the end of QE. He pointed out that price acceleration is largely driven by energy costs, and that political risks including national elections have the potential to knock the recovery off course.
Euroskeptics could win increased support in elections in the Netherlands next week, France in May and Germany in September. New U.S. President Donald Trump has railed against global trade rules, and the U.K. is about to start formal negotiations to leave the European Union.
Further highlighting the tricky balance the ECB is trying to strike between confidence in the outlook for economic growth and concern over the risks, he said the current round of targeted long-term loans to banks will lapse this month, but remain an instrument that could be used in the future.
“Our monetary policy has been a success,” he said, but “we have to see how improved prospects translate into higher headline inflation.”