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Financial News: ECB's Draghi Says Eurozone Recovery Still Dependent On

ECB's Draghi Says Eurozone Recovery Still Dependent On QE

11/17/2017 - 08:29:00 (RTTNews)

(RTTNews) - Eurozone's robust economic recovery is still supported by the massive monetary stimulus that would help inflation to return to target, European Central Bank President Mario Draghi said Friday.

"A key motor of the recovery remains the very favourable financing conditions facing firms and households, which are in turn heavily contingent on our policy measures," Draghi said in a speech in Frankfurt.

"An ample degree of monetary stimulus remains necessary for underlying inflation pressures to build up and support headline inflation over the medium term."

Late October, the ECB said the size of its monthly asset purchases will be halved to EUR 30 billion at the start of next year, but they will continue for nine months.

Draghi said the October decisions "aim to signal our growing confidence in the euro area economy, while also acknowledging that we must be patient and persistent for inflation to return sustainably to our objective."

The bank opted the "lower for longer" style of tapering for a second time this year and many hope this would be the beginning of the end of ultra-easy monetary policy since the 2007-08 global financial crisis.

The ECB Chief said the extension of asset purchases helps to maintain the necessary degree of accommodation and thereby to accompany the economic recovery in an appropriate way.

The bank's forward guidance suggest that it will keep interest rates low for the duration of its bond purchases and well beyond their lifespan. This is an attempt to anchor rate hike expectations during that time and after the end of asset purchases, Draghi said.

"Asset purchases matter also for the signals they entail about the path of future policy rates: the so-called "signalling effect", Draghi said.

"The signalling effect of asset purchases has therefore naturally increased in prominence relative to the duration effect," he added.

Further, Draghi said this explains why the October decision to reduce the pace of purchases while extending the horizon "left, on impact, financial conditions largely unchanged".

Draghi also reiterated that there was little evidence that the ECB's ultra-easy monetary policy was hurting bank profitability and cited that net interest income has remained quite stable over the past two years.

Expressing concern over the lack of upward momentum in the underlying inflation in the euro area, Draghi said a key issue in this context was weaker wage growth.

"With well-anchored inflation expectations, the effects of past low inflation in wage formation should not be persistent," he said.

"And as the labor market tightens and uncertainty falls, the relationship between slack and wage growth should begin reasserting itself. But we have to remain patient."

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