June 3, 2015 / 6:39 AM / 4 years ago

ECB sees growth faltering as it presses on with QE

FRANKFURT (Reuters) - Europe has lost some growth momentum and bond market volatility is here to stay, the European Central Bank said on Wednesday, pledging to see through its money printing scheme until its job of lifting the economy is done.

General view of the exterior of the European Central Bank (ECB) building on the inaugural of it's new headquarters in Frankfurt March 18, 2015. REUTERS/Wolfgang Rattay

In remarks after the bank left rates on hold at record lows, ECB president Mario Draghi also urged a deal with Greece, which is facing default without aid, in order to keep it in the currency bloc.

In what may be seen as a concession, Draghi said the eventual deal, now under negotiation, should take into account Greece’s economic decline, particularly when setting fiscal targets that Athens argues are too demanding.

But he made it clear that the ECB would not tide over Greece’s finances in the meantime by loosening restrictions on short-term funding before euro zone backers first release loans.

“The Governing Council of the ECB wants Greece to stay in the euro zone,” Draghi told a news conference.

“The current downgraded growth perspectives of the Greek economy should be taken into account in determining what the appropriate budgetary surplus figures should be.”

Investment bank Barclays said the tone of Draghi’s comments, where he referred to ‘social fairness’, may signal a more conciliatory tone in the ECB’s stance.

“We think that Draghi’s choice of words in his response, including on ‘social fairness’, signals the willingness for Europe to also consider Greece’s needs,” Barclays said.

Still, edgy bond markets sold off on Draghi’s comment, anticipating a more reassuring message, and normally rock-solid German 10-year yields DE10YT=RR continued their climb.

They are up more than 30 basis point in two days, their biggest jump in years.

As analysts sought to explain Wednesday’s bond market move, JP Morgan said markets were overreacting to a slight increase in 2015 inflation forecast.

Draghi said the selloff in recent weeks was due to a range of factors and insisted the bank would look though the volatility.

“We should get used to periods of higher volatility,” he said. “At very low levels of interest rates, asset prices tend to show higher volatility.”


Though deflation has ended and prices rose faster than markets expected in May, alleviating the bank’s biggest headaches, Draghi admitted that growth prospects have dimmed and the bank slightly cut its 2017 gross domestic product (GDP) growth forecast.

“There has been a loss or some loss of momentum, modest I would say ... mostly due to weakening of the economies outside the euro area, emerging markets mostly,” he said.

Still, he said economic growth would broaden and risks are now more balanced, due in part to the bank’s 1-trillion-euro plus asset buying programme, known as quantitative easing, which the ECB could in theory even expand, even if such an option is not being discussed.

The bank rolled out the asset buying scheme earlier this year to boost prices on the grounds that inflation is set to undershoot its target until 2017.

Early indications are that the scheme is working. Data this week showed euro inflation turned positive in May and the closely-watched core rate jumped to 0.9 percent, prompting the bank to lift its full-year forecast to 0.3 percent from the unchanged prices seen in March.

Inflation next year is seen at 1.5 percent then rising to 1.8 percent in 2017, in line with earlier projections, but only if the money printing programme is carried out in full, Draghi said.

“Risks remained to the downside to both price and growth stability,” Citi said in a note. “Most of the growth risks were seen as coming from outside Europe, so even the downside risks were tapered.”

With global oil prices now rising and the impact of last year’s dramatic fall dropping out of the equation by the end of 2015, price pressures should rise automatically.

But Draghi rejected any suggestion that the money printing operation should end ahead of schedule and said it was too early to even discuss how it would end.

“Exit strategies are a really high-class problem, and we’re really far from that, so we are not discussing anything about that,” he said, adding that there was a “long way to go” on inflation.

Writing by Mike Peacock; Editing by Jeremy Gaunt

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