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Deflation risks have definitely gone away, ECB's Draghi says

By Alexander Bueso

Date: Thursday 08 Jun 2017

Deflation risks have definitely gone away, ECB's Draghi says

(ShareCast News) - Rate-setters at the European Central Bank are more confident that inflation is headed back towards their targetted level.
Speaking at the press conference following Thursday's policy decision, chief Mario Draghi said there was no longer a risk of deflation, hence the Governing Council's decision to delete any reference to the possible need for further interest rate cuts in the future.

"That is to say, deflation risks have definitely gone away," Draghi told journalists.

However, the Governing Council retained the option to top up its quantitative easing programme should the outlook turn "less favourable" or tighter financial conditions threaten the ECB's price stability objective.

By way of an immediate reaction, the single currency was 0.31% weaker against the US dollar as of 1408 BST.

Despite that, the risks surrounding the outlook for growth in the Eurozone were judged to "broadly balanced", Draghi said in remarks prepared for his speech.

"The risks surrounding the euro area growth outlook are considered to be broadly balanced. On the one hand, the current positive cyclical momentum increases the chances of a stronger than expected economic upswing. On the other hand, downside risks relating to predominantly global factors continue to exist."

Indeed, the ECB bumped its projections for euro area GDP growth in 2017, 2018 and 2019 by one tenth of a percentage point in comparison to the projections it made in March, to 1.9%, 1.8% and 1.7%, respectively.

Inflation on the other hand was now seen lower over that same time horizon, rising by 1.5% in 2017 (instead of 1.7%), 1.3% in 2018 (instead of 1.6%) and by 1.6% in 2019 (instead of 1.7%).

"Measures of underlying inflation remain low and have yet to show convincing signs of a pick-up, as unutilised resources are still weighing on domestic price and wage formation," Draghi said.

The ECB's boss cited factors such as backward-looking wage negotiations and the high proportion of temporary and part-time work as factors which were dampening underlying inflation.

People needed to be patient and confident that stronger growth would feed into higher productivity and wages, he said.

He also pointed out how 5.0m jobs had been created across the euro area over the past three-and-a-half years, more than anywhere else on the globe, including in the US.

When asked whether the policy decisions taken on Thursday had been unanimous, Draghi coily indicated that no dissent had been voiced.

Draghi also said the GC had not discussed the expected start date to tapering the ECB's QE programme.

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