ECB's Draghi confident, but argues for patience and persistence
By Alexander Bueso
Date: Friday 16 Nov 2018
(Sharecast News) - Outgoing European Central Bank President, Mario Draghi, sounded a confident note on the outlook for the euro area economy, describing a recent slowdown as a 'soft patch', but said policymakers needed to be "patient and persistent" in providing monetary stimulus.
He did reiterate that the ECB's asset purchases would finish at the end of 2018.
However, Draghi also said that "if financial or liquidity conditions should tighten unduly or if the inflation outlook should deteriorate, our reaction function is well defined."
In remarks prepared for his last speech as ECB chief to the European Banking Congress, in Frankfurt, Draghi said the slowdown in international trade did need to be monitored, but 'one off' factors such as regulations for vehicle emissions had also played a hand in recent soft data on auto production.
So while trade uncertainty needed to be watched carefully, consumption was holding up well on the back of strong gains in employment, especially in countries that had carried out structural reforms, with Germany, Portugal and Spain all being good examples.
"Most important is the virtuous circle between employment, labour income and consumption, which has been the motor of growth throughout the recovery. Various indicators suggest this cycle has not been disrupted by the loss of growth momentum this year," Draghi said.
To back up his case, the central banker also highlighted the increase seen in the Eurozone labour force participation rate since 1997.
And trade uncertainty had not yet impacted business investment, he added.
As well, on the basis of historical comparisons, the current upswing still had further to run, he said.
Household net worth was "solid", the ECB's boss said, while in the front half of 2018, loans to firms grew at their fastest clip since 2012, even as the cost of bank borrowing fell to a record low.
On inflation, Draghi argued for patience, but reiterated the Governing Council's assessment that inflation was headed back to target.
"Thus, following several years of low inflation in the euro area, a more tentative pass-through of wages to prices is understandable.
"[...] The underlying strength of domestic demand and wages continues to support our view that the sustained convergence of inflation to our aim will proceed. But in the light of the lags between wages and prices after a period of low inflation, patience and persistence in our monetary policy is still needed."
Nonetheless, there were risks, mainly from excessively high spending deficit for the current stage of the economic cycle.
Draghi said: "[a] lack of fiscal consolidation in high-debt countries increases their vulnerability to shocks, whether those shocks are autonomously produced by questioning the rules of EMU's architecture, or are imported through financial contagion."
There were other risks too.
"Other risks stem from the possibility of a disorderly increase in global risk premia," Draghi said.
"The reaction of asset prices to surprise inflation in other jurisdictions at a more advanced stage in the business cycle, a return to the financial deregulation that was the primary cause of the financial crisis, and fragilities in several emerging market economies exposed to currency mismatches, are all risks that warrant close monitoring."
Draghi concluded by stressing the urgent need to complete the banking union and to embark on a capital markets union.
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