The head of the ECB addressed the elephant in the room in Tuesday’s speech – the apparent contradiction between above trend growth across the euro area and the disproportionately “muted” inflation dynamics.
Though he admitted “there are still factors that are weighing on the path of inflation,” he stressed these were mainly temporary factors and that persistent monetary accommodation was required for inflation to become durable and self-sustaining.
“The role of monetary policy in this growth story is clear,” Draghi stressed.
The eurozone has recently seen sixteen consecutive quarters of growth, he pointed out, adding that the employment picture has also improved dramatically.
“According to our Bank Lending Survey, our latest easing phase has coincided with a strong rebound in demand for consumer credit to purchase durable goods, while demand for loans for fixed investment has gradually firmed,” the ECB president said.
“At the same time, falling borrowing costs have reduced interest payment burdens and facilitated deleveraging, which is one reason why, for virtually the first time since 1999, spending has been rising while indebtedness has been falling.
“This is a sign that the recovery may be becoming more sustainable.”
Emboldened by Draghi’s prognosis, the euro took off against the pound, rising 0.62% to £0.8844 by the late afternoon.
Meanwhile in the UK, the Financial Policy Committee announced that the countercyclical capital buffer had been brought back up to 0.5% from 0%, in a sign that the economy has become more resilient post-financial crisis.
However, at the financial stability report press conference, governor Carney highlighted several “pockets of risk that warrant extra vigilance.”
