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Draghi optimism on inflation sends euro higher

Draghi optimism on inflation sends euro higher

Draghi optimism on inflation sends euro higher
June 27
16:15 2017

Mario Draghi has said he is “confident” that the European Central Bank’s policies would restore inflationary pressures in the eurozone and that the scars inflicted by the crisis will fully heal.

The bullish assessment of the eurozone recovery will fuel speculation that monetary policymakers could soon begin discussing a withdrawal of stimulus.

“All the signs now point to a strengthening and broadening recovery in the euro area,” the ECB president told the bank’s annual conference in Sintra, Portugal, on Tuesday. “Deflationary forces have been replaced by reflationary ones.”

As Mr Draghi spoke, the euro climbed 0.7 per cent against the dollar to $1.1258, its highest since June 14, although the rally coincided with a wider trend for a weaker US currency. In late London trading, it broke through the $1.13 mark for the first time since September.

The ECB president said all the evidence suggested the central bank was managing to raise demand. He also indicated he was not overly concerned about the recent weakness in inflation, which he said was down to global factors and changes in the labour market that meant there was less pressure on companies to raise wages.

He described the weakness in inflation as “temporary” and predicted that the ECB could achieve its target of just under 2 per cent in the medium term. He said the risk of so-called “hysteresis effects” — where damage inflicted by crises becomes permanent — had diminished too.

“Now we can be confident that our policy is working and that those risks have abated,” Mr Draghi said.

However, he signalled some central bank support would need to remain in place and that a rise in inflationary pressures was “not yet durable and self-sustaining”.

“Our policy needs to be persistent and we need to be prudent in how we adjust its parameters to improving economic conditions.”

Frederik Ducrozet, economist at Pictet Asset Management, said: “Draghi does sound fairly confident as regards political risks and the potential for eurozone-wide reforms, surprisingly so given the disappointment from the past few years.” However, Mr Ducrozet said he sounded as cautious “as usual” on inflation.

“As Draghi said, not all the criteria are met at this stage for a rise in inflation to be self-sustaining, suggesting to us that a tapering announcement could well be postponed beyond September,” Mr Ducrozet added.

The ECB has edged towards an end to its quantitative programme, under which it is now buying €60bn worth of government bonds a month. Earlier this month, the bank dropped a promise to cut rates should conditions worsen.

This shift in rhetorical tone is seen as a key step towards tapering QE next year. A discussion on tapering is expected to come later in the summer. The programme, aimed at boosting inflation and growth, is set to surpass the €2tn mark this year.

“Mr Draghi continues to use the eurozone’s structurally low-inflation environment as the crutch for a slow removal of policy accommodation,” said Stephen Gallo, European head of foreign exchange strategy at the Bank of Montreal.

“There is nothing positive for the euro in his remarks at all and were the dollar not soft today the euro would probably be lower. The general environment in the market has been characterised by a soft dollar.”

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