ECB's Draghi confident inflation headed back to target
Policymakers at the European Central Bank downplayed the recent spate of weaker-than-expected readings on the economic, expressing confidence in the outlook for both activity and prices, as well as on the outcome of the negotiations between Brussels and Italy as well as for the UK's talks on withdrawing from the European Union.
"Incoming information, while somewhat weaker than expected, remains overall consistent with an ongoing broad-based expansion of the euro area economy and gradually rising inflation pressures," ECB chief, Mario Draghi, said in his introductory statement before Thursday's press conference.
"The underlying strength of the economy continues to support our confidence that the sustained convergence of inflation to our aim will proceed and will be maintained even after a gradual winding-down of our net asset purchases."
On activity, he stressed that the data thus far was not pointing to a "downturn", but rather a slowdown with growth returning towards potential after 2017.
Indeed, in some cases, indicators remained "well above" their historical averages.
Among the drivers of slower growth, during the 'question and answer session' after the presser, Draghi cited 'country-specific' factors such as exports in Germany, and more generalised headwinds including uncertainty on trade, Brexit and Italy.
Related to the above, towards the end of the Q&A he said that overall the private financial sector in the Eurozone was "not
over-leveraged", although valuations in some corners of the markets, such as for high-yield or so-called 'speculative' grade corporate debt were "over-stretched".
For the outlook on inflation, he pointed to the recent higher trend in negotiated wages, describing them as a "comforting sign", as well as labour markets that were getting "tighter and tighter".
Another factor underlying Draghi's confidence were the then high rates of capacity utilisation.
Nevertheless, some analysts were less sure.
Coincidentally, just after the conclusion of Draghi's Q&A, Barclays Research's Fabio Fois inked a research note telling clients that so-called 'core' consumer prices in the Eurozone would rise by just 1.0% and 1.2% over the course of 2018 and 2019, respectively.
At the headline level meanwhile, the rate of advance in CPI over those two years was set to average 1.8% and 1.6%.
In parallel, Barclays's Antonio Garcia Pascual said: "as expected President Draghi made no policy announcement but signaled growing concerns about weaker momentum and rising risks.
"While the ECB did not change the assessment of a 'balanced risk profile' for the euro area, we believe the risks ahead remain tilted to the downside (protectionism, China, geopolitics, Italy)."
Regarding Italy, Draghi said he was "confident" that Brussels and Rome would reach a deal. He expressed the same opinion about the Brexit negotiations, saying he was still confident that a "good common sense" solution would be found, but warned of the economic costs associated with companies simply being forced to plan for worst case outcomes.
To take note of as well, in response to the multiple queries from journalists about the possibility that the Governing Council might revert course on its decision to wrap-up the ECB's asset purchase programme at the end of the year, Draghi responded that the subject had not even been broached by the Governing Council.
On the possibility of deploying an OMT programme just for Italy, Draghi reminded journalists that that would itself require an ESM programme, adding that the ECB would not react to the problems of any member state originating from its own policies.