ECB Sees Strong Euro-Area Expansion as Uncertainties Endure

(Bloomberg) -- European Central Bank President Mario Draghi said policy makers are still uncertain about a key driver of inflation even as he expressed confidence in the broad outlook for euro-area economic growth.

“We expect the pace of economic expansion to remain strong in 2018,” Draghi said in the institution’s annual report published Monday. “While we remain confident that inflation will converge towards our aim over the medium term, there are still uncertainties about the degree of slack in the economy.”

The ECB will therefore maintain a “patient, persistent and prudent” policy stance, he said. His colleague Vice President Vitor Constancio -- who will leave his post in May -- told the European Parliament in Brussels that price pressures are only expected to rise gradually and that officials must remain cautious not to “derail” those developments.

The central bank’s Governing Council is discussing when and how to withdraw extraordinary support, and is expected to wind down asset purchases after September. Its next meeting to set policy is on April 25-26.

A spate of recent data for the euro area has pointed to growth leveling out, with gauges for economic activity and retail sales missing economist estimates and investor confidence slipping. The downward dynamic has been particularly pronounced in Germany, the region’s largest economy, where figures for exports and industrial production both saw a sharp drop in February.

Economists have so far written off much of the slowdown as being caused by temporary factors. Prior to the release of many of the recent data, the ECB in March raised its 2018 forecast for growth to 2.4 percent.

Read more: ECB Study Says It’s Unclear If Easy Money Policies Support Reforms

While the central bank is confident in the economic outlook, Draghi said officials have acknowledged that patience is needed for inflationary pressures to build up. Still, the impact of lower unemployment on price pressures isn’t so straightforward, and the annual report cites recent research that shows models measuring this relationship tend to overestimate inflation.

“While traditional models provide a good understanding of the drivers of inflation in the euro area, they do not fully capture the complexity of the current economic environment in generating inflation,” the report stated. “Nevertheless, economic slack is still relevant and, in the euro area, the rebound in economic activity is expected to drive underlying inflation gradually upwards.”

Th ECB also criticized fiscal positions of some members of the euro area, saying several of them were still “sub-optimal.” Policy makers have often stressed that governments should use the window of opportunity provided by the ECB’s still-accommodative policy to improve their positions and implement structural reforms. The annual report states that the latter tend to occur during an adverse macroeconomic environment, rather than during periods of strength.

--With assistance from Ross Larsen Alessandro Speciale Piotr Skolimowski Catherine Bosley Zoe Schneeweiss David Goodman and Lucy Meakin

To contact the reporters on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net, Alexander Weber in Brussels at aweber45@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Kevin Costelloe, Jones Hayden

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