Draghi Says Stimulus Withdrawal on Track Despite Growth Wobble
(Bloomberg) -- Mario Draghi played down risks to the economy as he set the European Central Bank up for a weightier meeting in December when policy makers will have new forecasts.
While momentum may have weakened due to temporary factors such as production holdups in the German car industry, risks are still “broadly balanced” in the 19-nation economy, Draghi said in Frankfurt after the ECB kept its policy unchanged.
“Incoming information, while somewhat weaker than expected, remains consistent with the base case scenario of ongoing broad-based expansion,” the President told reporters. The “underlying strength of the economy continues to support our confidence” in the gradual convergence of inflation toward the central bank’s goal.
As the ECB prepares to wind down its stimulus program, there are signs that the euro area is starting to lose steam under the strain of global trade tensions. Domestic momentum weakened further toward the end of the year and the list of risks continues to grow -- from the stand-off over Italy’s rule-busting budget to U.S. protectionism and a potentially disorderly Brexit.
Draghi said consumption in the euro area is strong and the increases in negotiated wages are “a very comforting sign.” At the same time, he also signaled policy makers will need to wait for another set of projections to get a proper health-check of the economy.
Warning signs have been growing. A gauge for private-sector growth in the euro area slowed to the weakest since 2016 -- a level IHS Markit said Wednesday “would historically be consistent with a bias toward loosening monetary policy.” The German economy may have stalled temporarily in the third quarter as car makers grapple with new emissions testing, the Bundesbank said earlier this week.
The Governing Council dropped a previous line saying that uncertainty around the outlook for inflation is receding. Draghi said there’s “no sense that we should doubt our confidence that inflation is gradually converging to our aim.” The labor market is becoming tighter and recent wage increases are here to stay, he added.
Draghi also sidestepped questions about the impact from a budget stand-off in Italy, where the yield on 10-year bonds has almost doubled since elections in March as investors question the populist government’s spending plans. The situation in his home country is “a fiscal discussion” and didn’t feature much during the meeting.
The ECB President spoke after the Governing Council confirmed it still expects to cap bond buying under its 2.6 trillion ($3 trillion) asset-purchase program at the end of the year. It reiterated plans to keep interest rates at their current record lows through the summer of 2019. The first increase could come in September, according to economists surveyed by Bloomberg.
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