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ECB's Draghi Says He's in No Rush to End Easy Money -- Update

27 Jun 2017 10:12 am
By Tom Fairless 

SINTRA, Portugal--The European Central Bank should be cautious about reducing its large monetary stimulus as the eurozone economy recovers, President Mario Draghi said on Tuesday, indicating that the ECB will move only gradually to unwind its easy-money policies.

The comments, at the ECB's annual economic-policy conference in Portugal, come as investors watch closely for signs of a policy change from Frankfurt as the 19-nation economy accelerates.

Most analysts expect the central bank to announce in September or October that it will start tapering, or winding down, its EUR60 billion ($67.52 billion) a month bond-buying program, known as quantitative easing or QE.

Mr. Draghi didn't directly address the timing. He stressed that the ECB's policies are working and will be gradually withdrawn as the economy recovers, but he warned against any abrupt moves.

"For us to be assured about the return of inflation to our objective, we need persistence in our monetary policy," Mr. Draghi said. "Any adjustments to our stance have to be made gradually, and only when the improving dynamics that justify them appear sufficiently secure."

That cautious tone from the ECB chief is likely to disappoint officials in Northern Europe, who have been calling for a swift exit from stimulus as economic growth and inflation recover.

Still, the ECB chief highlighted positive developments including broadening economic growth and reduced political uncertainty. Emmanuel Macron's victory in France's presidential elections last month helped stem concerns that his far-right rival, Marine Le Pen, might drastically alter the shape of the eurozone.

"Political winds are becoming tailwinds," Mr. Draghi said. "There is newfound confidence in the reform process, and newfound support for European cohesion, which could help unleash pent-up demand and investment."

Eurozone government bond yields jumped after the speech, and the euro rose by more than half a cent against the dollar, to 1.1257.

Still, the cautious tone from the ECB chief is likely to disappoint officials in Northern Europe, who have been calling for a swift exit from stimulus as economic growth and inflation recover.

The dilemma for ECB officials is that while eurozone growth is accelerating, outpacing the U.S. in the first quarter, the bloc's inflation rate remains weak. It slid to 1.4% in May, some way below the ECB's target of just below 2%.

In his speech, Mr. Draghi sought to explain the ECB's failure to push inflation higher, despite years of aggressive stimulus.

One factor, he said, is falling energy and commodity prices. Another is that workers may be less able to demand higher wages than in the past, perhaps because labor-market reforms have expanded the labor force, or because a large number of employees are working less than they would like.

The ECB chief stressed such factors are only temporary, and that the bank's stimulus would eventually feed through to higher wages and prices.

"As the economy picks up we will need to be gradual when adjusting our policy parameters, so as to ensure that our stimulus accompanies the recovery amid the lingering uncertainties," Mr. Draghi said.

Write to Tom Fairless at tom.fairless@wsj.com

(END) Dow Jones Newswires

June 27, 2017 06:12 ET (10:12 GMT)

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