Draghi Sees Economic Risks Worsening Even as QE Era Concludes
(Bloomberg) -- Mario Draghi said risks to the euro-area economy are worsening even as he called time on the European Central Bank’s flagship deflation-fighting tool.
The ECB president told reporters in Frankfurt that while risks are still “broadly balanced,” they are now “moving to the downside” because of a range of concerns over geopolitics, trade protectionism and market volatility. The significant change in language pushed the euro lower and was reflected in updated economic projections that lowered the immediate outlook for inflation and growth.
Draghi’s caution underscores a gamble the ECB is taking by capping its massive monetary support after almost four years of purchases that added 2.6 trillion euros ($3 trillion) to the institution’s balance sheet. Now policy makers expect that by reinvesting proceeds from maturing bonds they will deliver enough stimulus to tide over the fragile expansion.
What Our Economists Say...
|“Overall the tone is more dovish than at the last press conference and probably exceeded what most market participants expected. Coupled with what seemed like an endorsement of market pricing from the ECB President Mario Draghi, it now seems likely that the first rate hike will come later than September -- probably December.”|
-- Jamie Murray, David Powell and Maeva Cousin, Bloomberg Economics
The ECB will reinvest for an extended period of time past the date when interest rate increases start. It will also give itself more leeway to make purchases - a year rather than three months previously -- to “allow for a regular and balanced market presence.” Policy makers expect to keep borrowing costs at record lows at least through the summer of next year.
Draghi described the ECB’s view about the outlook for the 19-nation economy as representing “continued confidence with increasing caution.” The underlying strength of domestic demand continued to drive the expansion as labor markets tighten and wages grow faster. On the other hand, diminishing contribution from external demand “may suggest some slower growth momentum ahead,” he said.
ECB Economic Forecasts for the Euro Area
The announcement came after a spate of central-bank decisions in Europe. The Swiss and Norwegian central banks left policy unchanged, though the Swiss National Bank cut its inflation outlook and President Thomas Jordan said there is room to ease policy further if needed. The Federal Reserve is set to hike rates next week for the fourth time this year.
The Governing Council didn’t discuss when interest rates will rise nor how long it will continue reinvestments. Policy makers are “reflecting” on possibilities for a new round of longer-term loans to banks, Draghi said.
The ECB is ready to adjust its instruments if needed to meet its goal of sustained inflation just below 2 percent over the medium term, he said. While policy makers didn’t consider extending quantitative easing into next year, it remains in the central bank’s arsenal if needed.
“QE is part now of the tool box,” Draghi said. “It’s permanent, it’s something that may be considered usable in contingencies that the Governing Council will assess in its full independence.”
Economists surveyed by Bloomberg last week predicted borrowing costs will rise in September 2019, but investors are more cautious. They’ve pushed back bets on when the next hike will come, pricing an increase for the first quarter of 2020.
©2018 Bloomberg L.P.