European Central Bank still confident despite slower growth

27 April, 2018, 00:15 | Author: Barbara Daniel
  • Mario Draghi head of the European Central Bank in Frankfurt today where he said eurozone growth was slowing

Euro zone banks have brought down their pile of unpaid loans "enormously" and further progress, while necessary, should be gradual, European Central Bank Vice-President Vitor Constancio said on Thursday.

As the central bank approaches technical limits to its bond-buying, it has little choice but to hope such forecasts come true as it tiptoes on a path out of QE defined by Draghi's favourite adjectives: "confidence, patience, persistence and prudence".

"Following several quarters of higher than expected growth, incoming information since our meeting in early March points towards some moderation while remaining consistent with a solid and broad-based expansion of the euro area economy", he told reporters in Frankfurt.

Draghi warned that rising protectionism was starting to pose a "more prominent" risk to the eurozone outlook after US President Donald Trump fanned fears of a global trade war.

With the euro zone economy expanding for 20 straight quarters and millions of new jobs created, the main debate among policymakers is about how quickly to withdraw stimulus and preserve European Central Bank firepower for the next downturn.

This suggests the euro zone's economic downturn was more severe than earlier thought and makes the recovery even more protracted.

Draghi dismissed the slow-down as of little effect to the broader themes of regional growth and convergence with more normal levels of inflation in the medium-term - at or just below the ECB's target of 2.0%.

There is caution as well as confidence on inflation, he also said.

On top of leaving the short-term interest rate at zero on Thursday, the ECB council did not touch the deposit rate at which the ECB takes deposits from commercial banks.

The ECB left all its policy measures unchanged and did not touch the statement as expected.

The main refi rate is now at a record low zero percent and the deposit rate at -0.40 percent.

Even if the single currency's rise has petered out for now, exporters like Continental and Volkswagen flagged the exchange rate as a risk.

Draghi said a range of one-off factors including cold weather, labor strikes and the timing of the Easter holiday period had contributed to weakness seen in a number of read-outs across the euro zone in recent weeks. The currency is up 1.5 per cent against the dollar this year and just 0.3 per cent higher on a trade-weighted basis. This, in turn, could have ramifications for the ECB's sole policy objective of ensuring price growth returns to its near 2 percent target.

A stronger euro would cap inflation, but would affect growth and exports.

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