Draghi says investors better get used to higher volatility
“The asset-purchase programs are proceeding well,” the ECB president said at a press conference in Frankfurt on Wednesday after officials kept interest rates on hold and he unveiled new forecasts projecting a pickup in growth and inflation in the next three years. “Reaching our objectives is conditional on the full implementation of our monetary-policy stance.”
Since the ECB started its 1.1 trillion-euro ($1.2 trillion) quantitative-easing program three months ago, the inflation rate in the 19-nation euro area has turned positive, though it remains far short the ECB’s goal of just below 2 percent.
The improving economic performance comes despite uncertainty created by international creditor talks on Greece as the country flirts with default. Greek Prime Minister Alexis Tsipras will meet with European Commission President Jean-Claude Juncker in Brussels on Wednesday evening.
“There should be a strong agreement — one that produces growth,” Draghi said, while declining to give details on current negotiations over the country’s bailout package.
ECB policy makers expect the recovery to broaden, and “domestic demand should be further supported by our monetary-policy measures,” Draghi said. “The recovery is on track exactly according to our projections.”
Government debt extended a global slump after Draghi said markets must get used to periods of higher volatility. The German 10-year bond yield rose to the highest this year at 0.887 percent. The euro was up 0.9 percent at $1.1249 at 4:44 p.m., after surging 2.1 percent Tuesday.
The chief area of good news for Draghi is evidence the deflation scare that helped usher in QE may be on the wane. The inflation rate in the euro area was positive for the first time in six months in May, rising to 0.3 percent from zero. Core inflation, which strips out typically volatile energy and food prices, was 0.9 percent, the fastest in nine months.
“The ECB is pleased with itself and with its decisions,” said Martin Moryson, chief economist at Sal. Oppenheim in Cologne. “But fortune favors the diligent. The ECB started its asset program right at the low points of the oil price and the inflation rate.”
Presenting the latest round of forecasts, Draghi said the outlook remains basically unchanged compared with the March prognosis. Inflation will be 0.3 percent this year instead of zero as previously predicted, and will reach 1.8 percent in 2017. Growth in 2015 is expected to average 1.5 percent, then 1.9 percent in 2016, before a 2 percent pace the year after.
At the same time, the ECB president warned that slowing global growth could threaten those scenarios.
“We had expected figures stronger than our projections,” he said. “There has been some loss of momentum, mostly due to the weakening of economies outside the euro area.”
The Organization for Economic Cooperation and Development cut its global growth forecast on Wednesday, saying investment is lagging and risks including a possible Greek default are hurting confidence.
Draghi said there’s still a long way to go on the road to a euro-zone recovery, and there is no discussion yet among policy makers about how to exit from the current programs. Purchases of sovereign debt, covered bonds and asset-backed securities are intended to average a total of 60 billion euros a month through September 2016.
If anything, the ECB will add to the program, though it doesn’t currently see a need, he said.
“The core message of the ECB was that it will stay the course, firmly committing to the full implementation of QE even as growth and inflation picks up,” said Johannes Gareis, an economist at Natixis in Frankfurt. “We see a non-negligible likelihood that the ECB continues to buy private assets even after September 2016.”
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