Draghi clears path for euro economy as momentum builds

Mario Draghi says the euro region is firing on all cylinders, and he’s not about to get in the way.

After the International Monetary Fund (IMF) raised growth forecasts and the global elite in Davos heaped praise on the economy’s brighter prospects, the European Central Bank (ECB) president gave his own vote of support by saying that an interest-rate increase this year is very unlikely. That’s a green light for an expansion that’s entered its fifth year.

“You could call it ‘Operation Overheat,’” said Richard Barwell, an economist at BNP Paribas Asset Management in London. “By the time Draghi walks out the front door, unemployment could be setting record euro-zone lows.”

The economy probably grew the fastest in a decade last year, and GDP data due on Tuesday will probably show a 19th consecutive quarter of expansion at the end of 2017. The region gathered momentum in January, with the Purchasing Managers’ Index suggesting quarterly growth of 1 percent and German business confidence at a record high.

The euro’s ascent to a three-year high against the dollar may yet become a thorn in the economy’s side if it curbs exports and damps prices. Much of the attention on Thursday was on Draghi’s response to US Treasury Secretary Steven Mnuchin’s remarks that appeared to welcome a weaker dollar.

Draghi hit back, saying such comments may violate agreements to avoid competitive currency devaluations. Yet, he also said the euro’s strength was in part down to the region’s improving outlook. The IMF this week predicted a 2.2-percent growth in 2018, up from a previous estimate of 1.9 percent.

Crucially, Draghi declined to say that the euro had climbed too high. It rose further as he spoke and has added about 4 percent this year.

“His commentary on growth was relatively bullish,” said Nick Kounis, an economist at ABN Amro Bank NV in Amsterdam. “If you’re trying to talk down the euro, those kinds of comments are extremely unhelpful.”

Even with the solid pace of growth, returning inflation to the ECB’s goal still depends on central bank stimulus, Draghi said. While he officially kept policy guidance unchanged, he added an important note on the timing of withdrawing that stimulus.

“Based on today’s data and projections, I see very few chances at all that interest rates could be raised this year,” Draghi told reporters in Frankfurt. The ECB stuck by its plan to continue buying €30 billion ($37 billion) of assets a month until at least the end of September, and reiterated that rates would stay low well beyond that.

The ECB will update its forecasts for growth and inflation at its next monetary-policy meeting in March. They may change their communication on the outlook for policy at the same time, according to a Bloomberg survey conducted before Thursday’s meeting.

 

 

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