FRANKFURT, Sept 13 (Reuters) - The European Central Bank kept policy unchanged as expected on Thursday, staying on track to end bond purchases this year and raise interest rates next autumn, even as protectionist moves around the globe drag on growth.
Following are highlights of ECB President Mario Draghi’s comments at a post-policy meeting press conference.
I said inflation is going to hover around the present level for the rest of the year but then I gave numbers for next year and 2020.
Basically these numbers are the result of two different components. We project slightly lower oil prices but significantly stronger core inflation and that is because of the underlying strength of the economy and rising wages.
Nominal wage growth is higher in countries like Germany and lower in other countries but by and large even though underlying inflation remains muted we see a pick up in nominal wage growth everywhere.
So this leads us to say that the projection for inflation we have given, which is the result of these two components, will reach our objective over the medium term.
ON THE RISK OF CONTAGION FROM EMERGING MARKETS
When we say that foreign demand is weaker for the euro area, this may be due to the stronger exchange rate of the euro. We have to keep in mind that the depreciation of the Turkish lira actually accounts for much of that effect. So that was the context in which briefly we discussed that.
But we have to say that really, in the aggregate, what’s happening in Argentina and Turkey so far doesn’t show any significant spillover, although at a level of individual institutions one may well see significant exposures to local realities.
Unfortunately we have seen that words have created some damage and (Italian) interest rates have gone up... They have gone up for households and for firms, however all this hasn’t created much of a spillover to other euro area countries.
We’ve had the words, and the words have changed over past months. We’ve had the words, and what we’re now waiting for is facts. And the main fact is the draft budget law and the supplementary parliamentary discussion
SHADOW BANKING REGULATION
A lot of this business has migrated from the banking world to the non-banking world, the so-called shadow banking.
So the next step will be to ensure that equally strong regulation and supervision -- of course one has to take into account the differences in institutions -- would also be applied to the non banks.
Today, the private sector working group has recommended to use the Euro Short-Term Rate as an alternative free rate as a replacement for EONIA that no longer meets the criteria of the EU benchmark’s regulation and it will see its use restricted as of January 2020.
We welcome this decision, because it also brings the euro area closer to other jurisdictions where this issue has been addressed already.
We want to state clearly that the private sector plays the dominant role in ensuring a smooth transition.
FINANCIAL REGULATION ‘BACKTRACKING’
In other jurisdictions, we could sort of fear a backtracking to a world where there is less regulation. In the European Union, we don’t see that danger... As a matter of fact, the banks are stronger.
RISKS FROM PROTECTIONISM
We have to assess the extent of an escalation. That is one factor that certainly we have to look at.
TRADE SPATS AND ECB PROJECTIONS
The major source of uncertainty that we see in global output comes from the rising protectionism ... which by the way is reflected in the current macroeconomic projections only to the extent of the measures that have been implemented already.
So the current projections do not reflect the measures that have been announced, that have been threatened.
The increased uncertainties in some emerging markets is certainly one factor that adds to the general uncertainty in world markets. But having said that, so far, the spillovers from Turkey and Argentina to other countries have not been substantial.
EVER-IMPROVING LABOUR MARKET
The improving, ever-improving conditions of the labour market may elaborate on that (underlying economic strength), but certainly the last number is also quite significant.
The latest number about employment, it says that 9.2 million jobs being created in the euro area since 2013, and rising wages. So we are confident that our present monetary policy stance is consistent with our (inflation) aim.
ON REINVESTMENT AND A POSSIBLE “OPERATION TWIST”
We haven’t discussed and we haven’t even discussed when we’re going to discuss it. Having said that, we have two meetings before year-end, so we either discuss next time or in December.
We haven’t discussed either the Operation Twist or whether to reinvest in different maturities, but what I can confirm -- even though we haven’t discussed it I believe the Governing Council will be pretty unanimous on that -- is that the capital key will remain the guiding principle.
ABOVE-POTENTIAL GROWTH RATES
We have seen growth rates now for some time above growth potential.
Looking ahead, underlying inflation is expected to pick up towards the end of the year and thereafter to increase gradually over the medium term.
Uncertainty around the inflation outlook is receding.
MUTED UNDERLYING INFLATION
While measures of underlying inflation remain generally muted, they have been increasing from earlier lows.
The risks surrounding the euro area growth outlook can still be assessed as broadly balanced.
ECB STANDS READY TO ACT
The Governing Council stands ready to adjust all of its instruments as appropriate to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.
Uncertainties relating to rising protectionism, vulnerabilities in emerging markets, and financial market volatility have gained more prominence recently.
SIGNIFICANT STIMULUS NEEDED
Significant monetary policy stimulus is still needed to support the further buildup of domestic price pressures and headline inflation developments over the medium term.
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.
The incoming information, including our new September 2018 staff projections, broadly confirms our previous assessment of an ongoing broad-based expansion of the euro area economy and gradually rising inflation. (EMEA News Desk)
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