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Significant policy accommodation "still needed", ECB's Draghi says

By Alexander Bueso

Date: Tuesday 19 Jun 2018

Significant policy accommodation

(Sharecast News) - European Central Bank chief Mario Draghi sounded a confident note on the outlook for inflation on Tuesday, despite the multiple sources of uncertainty surrounding the outlook for growth.


Speaking at the ECB's Forum on Central Banking in Sintra, Portugal, Draghi also said that progress towards a durable adjustment higher in inflation had been "substantial".

However, monetary policy in the euro area needed to remain "patient, persistent and prudent," he added.

Regarding the outlook for inflation, he pointed out how compensation per employee had picked-up from its trough, to which one could add the recent wage deals in Germany, France and Spain.

Past restraint in public sector wage growth was also "starting to relax", Draghi said.

Nevertheless, at 1.9%, as per the results of the ECB's latest Survey of Professional Forecasters, inflation expectations were "anchored", which he said was "key".

Similarly, the ECB's latest projections were for headline CPI to be at 1.7% over each of the next three years, but with 'core' prices seen climbing "to even higher levels".

"Importantly, 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.

However, he went on to add that: "Significant monetary policy accommodation is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium-term."

In his speech, Draghi also pointed out the lack of 'capital deepening' seen thus far in the economic cycle, explaining that its contribution in the current growth phase had been approximately zero.

That compared to an average contribution of at least 0.6 percentage points to annual growth in past cycles, although there were signs that firms were now increasingly turning to capital in order to increase capacity.

Indeed, in the nearer-term it was developments on the demand side of the equation that required closer scrutiny, Draghi said.

On that front, it was "undeniable" that the uncertainty surrounding the growth outlook has recently increased, he explained, citing America's imposition of steel and aluminium tariffs, the risk of higher oil prices on the back of trouble in the Middle East and the possibility of persistent heightened financial market volatility.

Offsetting those, Draghi said, was the ongoing need for "significant accommodation" from the monetary authority.

"Our latest, unanimous decision ensures that the necessary monetary policy support remains in place."

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