Mario Draghi promised that the European Central Bank will take its time to lift interest rates, reinforcing last week’s agreement by policy makers to keep borrowing costs unchanged at least through the summer of 2019.
“We will remain patient in determining the timing of the first rate rise and will take a gradual approach to adjusting policy thereafter,” the ECB president said in a speech in Sintra, Portugal. “The path of very short-term interest rates that is implicit in the term structure of today’s money-market interest rates broadly reflects these principles.”
The euro extended declines after Draghi’s speech. The single currency was down 0.7% against the dollar at 11:17 a.m. Frankfurt time, trading at $1.1536.
Policy PathECB outlines future of QE and interest rates as inflation outlook improves
Source: European Central Bank
Note: 1Q 2018 inflation data shows actual value
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Draghi made it clear that the ECB’s plan to halt its bond-buying program this year, closing an extraordinary chapter in a decade-long struggle with financial crises and recession, doesn’t mean the central bank is ready to withdraw its support. Governing Council member Erkki Liikanen said that economic developments remain key in determining the path of interest rates.
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Mario Draghi in Sintra.
Source: ECB“The timing is important but also that the future depends on data,” he told reporters in Helsinki, adding that the ECB may keep borrowing costs at current lows even after the end of summer next year “if it is needed, to ensure monetary policy provides adequate support to reaching the price stability target.”
Growing UncertaintyIn his speech in Sintra, Draghi said euro-area inflation is finally picking up and the economy is showing underlying strength, while he also cautioned that uncertainty has grown.
“The downside risks to the outlook come from three main sources,” he said. “The threat of increased global protectionism prompted by the imposition of steel and aluminum tariffs by the U.S.; rising oil prices triggered by geopolitical risks in the Middle East; and the possibility for persistent heightened financial market volatility.”
The comments come just as China vowed to retaliate “forcefully” against President Donald Trump’s threat to impose tariffs on another $200 billion of Chinese imports. At the same time, the Organization of Petroleum Exporting Countries signaled ahead of its meeting in Vienna this week that it will raise oil production only moderately.
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Against this backdrop, the ECB president warned that, after years of low investment, the economy is hitting its speed limit. Capacity utilization stands above its long-term average in the euro area and in all large economies, he said. While companies have stepped up hiring, making the current upswing “job-rich,” investment has been slow to rise.
“The flipside of rising labor utilization has been a lack of capital deepening,” Draghi said. “Firms should increasingly turn to capital to lift capacity -- a process that has already begun as business investment has picked up and now stands above its pre-crisis level.”
Lessening slack in the economy means wages are beginning to pick up, strengthening policy makers’ confidence that inflation is converging toward the ECB’s goal of just under 2 percent. “Over the course of the past year, that convergence path has held firm, and the timing of when we expect to attain our objective does not appear to have receded further into the future,” he said.
— With assistance by Christopher Condon, Joao Lima, and Kati Pohjanpalo
(Updates with euro in third paragraph, comments from Liikanen in fourth.)