LONDON (Reuters) - The euro zone economy remains on course for the European Central Bank to cut stimulus by one more step at the end of the year, but normalization will not be any quicker than projected in June, ECB chief economist Peter Praet said on Tuesday.
Playing down market speculation that a recent comment by ECB President Mario Draghi foreshadowed quicker normalization, Praet said the process will be long and slow, because the current inflation path is based on substantial support from the ECB.
“There was nothing new,” Praet told a conference in London, referring to the Draghi speech. “Clearly, we see progress in underlying (prices), what is behind the inflation process. But it’s a long process and conditioned on very easy monetary conditions.”
Speaking to the European Parliament on Monday, Draghi predicted a “relatively vigorous” pick-up in underlying inflation. The euro strengthened and bond yields rose as investors tried to interpret his unusual wording.
But Praet dismissed the idea that there was a message in the choice of words and argued that the market reaction was unwarranted.
He even argued that recent market pricing, which put the bank’s first rate increase for some time in the fourth quarter of 2019, were broadly in line with the ECB Governing Council’s own scenario.
The ECB expects its 2.6 trillion-euro bond purchase scheme to end at the close of this year. It expects interest rates to remain steady at record lows “through” the summer of 2019, according to its recently confirmed guidance.
The comments also appear to reject a recent argument by Austrian central bank chief Ewald Nowotny that the ECB could speed up policy tightening.
Praet said that the biggest risk to the outlook is a “growth accident” or an unexpected drop in the bloc’s expansion, which could dampen the inflation outlook.
The bulk of such a risk stems from external factors, including protectionism and a slowdown in emerging markets, Praet argued. Domestic fundamentals appear robust, he said.
Reporting by Balazs Koranyi; editing by Andrew Heavens, Larry King