November 17, 2017 / 9:46 AM / a year ago

Cheap ECB cash still key for euro zone economy: Draghi

FRANKFURT (Reuters) - The euro zone economy remains dependent on cheap credit and the European Central Bank is using the extension of its massive bond buys to push out any expectation for a rise in borrowing costs, ECB President Mario Draghi said on Friday.

European Central Bank (ECB) President Mario Draghi holds a news conference following the governing council's interest rate decision at the ECB headquarters in Frankfurt, Germany, October 26, 2017. REUTERS/Kai Pfaffenbach

Draghi said the ECB was becoming increasingly confident that the euro zone’s economic recovery would continue but sluggish growth in wages meant monetary policy needed to remain easy.

“A key motor of the recovery remains the very favorable financing conditions facing firms and households, which are in turn heavily contingent on our policy measures,” Draghi said.

The ECB is on course to buy 2.55 trillion euros worth of bonds after deciding last month to continue buying bonds until September, or beyond if needed.

It also pledged to keep its interest rates at their current, record low levels “well past” the end of its bond buys.

Draghi said this pledge made continued bond purchases key for pushing market expectations for the first rate hike further into the future, helping to keep rates low.

“Asset purchases matter also for the signals they entail about the path of future policy rates: the so-called ‘signaling effect’,” Draghi told a banking conference.

“The signaling effect of asset purchases has therefore naturally increased in prominence relative to the duration effect.”

Through its “negative deposit rate” ECB has been charging banks since 2014 for parking idle cash at the central bank, attracting criticism from a sector already complaining about low profits and rising capital demands.

But Draghi said ECB research found “little evidence” that its policy was harming banks and any future damage would be offset by its favorable effect on the economy.

He also tackled accusations, particularly from Germany, that the ECB’s ultra-easy policy was fuelling a new credit bubble and said the recovery was instead “feeding on itself”.

“The recovery ... has not come against the backdrop of re-leveraging in any economic sector,” he said.

“We see more signs that growth is ‘feeding on itself’, i.e. spending multipliers and endogenous propagation are again supporting activity,” he added.

Reporting By Francesco Canepa; Editing by Balazs Koranyi; Editing by Jon Boyle

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