The eurozone still needs "considerable" monetary support from the ECB even as its economy improves steadily and inflation is on the rise. Since the beginning of the purchases of government bonds in January 2015 by the ECB, the Eurozone economy has grown by 3,6%, "more than the USA after Qe1 and Qe2 in the same period". In the same period of time "employment has grown by over four million" began the president of the ECB Mario Draghi, opening the annual forum of the central bank on monetary policy, held in Sintra, Portugal.
“All signs now point to a strengthening and broadening recovery in the eurozone. Deflationary forces have been replaced by reinflationary forces,” Draghi said. “However, a considerable degree of monetary accommodation is still needed for inflationary dynamics to become long-lasting and self-sustainable.”
The number one of the ECB explained that the dynamics of inflation is currently weaker than one might have expected, mainly due to factors of a temporary nature.
“In assessing the inflation outlook – Draghi said – we must keep in mind three factors. The first is having full confidence that monetary policy is effective and that the transmission of measures to the real economy is taking place. All the recent indicators demonstrate in this regard that growth is increasing, strengthening and expanding to all geographical areas and all sectors. Secondly – he continued – if deflationary forces prevailed before, now those favoring a recovery in inflation are having the upper hand. And finally the ECB believes that a considerable degree of monetary stimulus is still needed to ensure that the growth of the economy becomes sustainable and self-sufficient and therefore we must be persistent in conducting our policy and exercise caution in gradually adjusting the parameters of our policy when the growth of inflation has strengthened in order to adequately respond to any further uncertainty".
Any future monetary policy revision process, Draghi then reiterated, will therefore be gradual. After the intervention of the president ECB the Borsa Italiana recovered its losses and the Ftse Mib returned to a moderate increase of +0,19%.
One of the reasons why growth in the Eurozone is performing better than inflation - Draghi said - could be the fact that past low inflation is continuing to weigh on wage formation, with contracts indexed to price trends in the past . Draghi noted that “there are signs that indexation has returned to some large eurozone countries. In Italy, for example, indexing aimed at the past now concerns around a third of private contracts”. “The structural reforms – he further observed – which have increased bargaining at the company level (rather than at the national level, ed.) may have made wages more flexible downwards, but not necessarily upwards”. In any case, once the slack diminishes, “there will be upward pressure on prices”: it is simply a question of waiting for monetary policy to have “full effect”.
(updated at 11,28 on June 27)
