February 26, 2018 / 3:24 PM / in 7 months

Euro zone economic slack may be bigger than thought: Draghi

FRANKFURT (Reuters) - Slack in the euro zone economy may be bigger than previously estimated and this could slow the rise of inflation but only temporarily and prices will eventually climb, European Central Bank President Mario Draghi said on Monday.

FILE PHOTO: European Central Bank (ECB) President Mario Draghi holds a news conference following the governing council's interest rate decision at the ECB headquarters in Frankfurt, Germany, January 25, 2018. REUTERS/Kai Pfaffenbach

The factors slowing the rise of inflation will wane as growth continues and the traditional relationship between growth and inflation remains intact, even if their correlation has been weakened in recent years, Draghi told the European Parliament’s committee on economic affairs.

His comments suggest the ECB remains confident that inflation is finally on an upward trend, supporting market expectations for the bank to finally end its bond purchase program this year, satisfied that inflation will eventually hit its nearly 2 percent target.

“Given the uncertainty surrounding the measurement of economic slack, the true amount may be larger than estimated, which could slow down the emergence of price pressures,” Draghi told a regular committee hearing. “This is particularly visible in the labor market.”

“Nonetheless, these factors should wane as the economic expansion continues and unemployment further declines,” Draghi said. “Looking ahead, we anticipate that headline inflation will resume its gradual upward adjustment, supported by our monetary policy measures.”

ECB board member Benoit Coeure argued on Friday that the bank already holds enough bonds to keep borrowing costs low, an argument taken as further evidence that the ECB is preparing investors for the end of its unprecedented asset purchases.

Launched three years ago to fight off the threat of deflation, the ECB’s 2.55 trillion euro ($3.14 trillion) bond purchase program has kept borrowing costs low to induce spending and investment, all with the ultimate aim of generating inflation.

Repeating the bank’s standard policy message, Draghi said the currency bloc’s strong growth momentum has strengthened his confidence in the inflation outlook but that patience and persistence with ECB policy were still needed.

This rise in inflation remained conditional on ECB stimulus, while financial market volatility, particularly the euro’s recent rise, is a source of concern and requires close monitoring.

Reporting by Balazs Koranyi; Editing by Catherine Evans

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