Draghi says QE proving its worth as economy exactly on track

Mario Draghi said monetary policy stimulus is filtering through to the economy as planned, as he insisted the European Central Bank needs to see its bond-buying plan through to the finish. 

PHOTO: REUTERS

JUN 3, 201510:03 PM

[FRANKFURT] Mario Draghi said monetary policy stimulus is filtering through to the economy as planned, as he insisted the European Central Bank needs to see its bond-buying plan through to the finish.

"The asset purchase programs are proceeding well," the ECB president said at a press conference in Frankfurt today, after officials kept interest rates on hold. He unveiled economic forecasts for a pickup in growth and inflation in the next three years similar to the outlook from March.

"Reaching our objectives is conditional on the full implementation of our monetary policy stance."

Since the ECB started its 1.1-trillion-euro (US$1.2 trillion) quantitative easing program three months ago, inflation in the 19-nation euro area has bottomed out, even though it remains far below the ECB's goal of just below 2 per cent. An improving economic performance comes despite the uncertainty created by talks on Greece as the country flirts with default.

"There should be a strong agreement - one that produces growth," Mr Draghi said, while declining to give details on current negotiations over the country's bailout package. Greek Prime Minister Alexis Tsipras will meet European Commission President Jean-Claude Juncker in Brussels on Wednesday evening.

"We expect the economic recovery to broaden, and domestic demand should be further supported by monetary policy measures," Mr Draghi said.

"The recovery is on track exactly according to our projections."

German 10-year bonds fell, sending yields to the highest this year, as Mr Draghi said markets must get used to periods of higher volatility after a rout in sovereign debt across the euro area.

The chief area of good news for policy makers is evidence the deflation scare that helped usher in QE may be on the wane. The inflation rate in the euro area was positive for the first time in six months in May, rising to 0.3 per cent from zero and beating economists' forecasts. Core inflation, which strips out typically volatile energy and food prices, was 0.9 per cent, the fastest in nine months.

Presenting fresh forecasts, Mr Draghi said the outlook remains basically unchanged. Inflation will be 0.3 per cent this year instead of zero as previously predicted, and will reach 1.8 per cent in 2017. Growth in 2015 is expected to average 1.5 per cent, then 1.9 per cent in 2016, before a 2 per cent pace the year after.

At the same time, the ECB president warned that slowing global growth could threaten those scenarios.

"We had expected figures stronger than out projections," he said. "There has been some loss of momentum, mostly due to the weakening of economies outside the euro area."

The Organization for Economic Cooperation and Development cut its global growth forecast on Wednesday, saying investment is lagging and risks including a possible Greek default are hurting confidence.

On Greece, "all our energies should be focused on finding a strong agreement along the lines I have described," he said. "Everything else would follow easily."

Mr Draghi said there's still a long way to go on the road to a euro-zone recovery, and there is no discussion yet about how to exit from the current policy programs. Purchases of sovereign debt, covered bonds and asset-backed securities are intended to average a total of 60 billion euros a month through September 2016.

"We are not going to be happy with one data point of inflation," he said. "We will have to look through the medium term."

BLOOMBERG