Draghi Sees Economic Risks Worsening Even as QE Era Concludes

Mario Draghi said risks to the euro-area economy are worsening even as he called time on the European Central Bank’s flagship deflation-fighting tool.
The ECB president told reporters that while risks are still ‘broadly balanced,” they are now “moving to the downside” because of a range of concerns over geopolitics, trade protectionism and market volatility. That’s a significant change in language and was reflected in updated economic projections that downgraded the immediate outlook for inflation and growth.
The euro dropped in a sign that investors are uncertain how much support the ECB will offer should the economy deteriorate further. Draghi was speaking after policy makers took the landmark decision to halt quantitative easing this month after almost four years of purchases that added 2.6 trillion euros ($3 trillion) to the institution’s balance sheet.

Key Insights

  • The Governing Council pledged to maintain the size of the QE portfolio by reinvesting maturing debt “for an extended period of time past the date when it starts raising the key ECB interest rates.” Rates will remain at record lows “at least through the summer” of 2019.
  • Details on the reinvestment strategy will be published at 3:30 p.m. Frankfurt time
  • Draghi said incoming data has been “weaker than expected” and that “this may suggest lower growth momentum ahead.”
  • He also said “the underlying strength of domestic demand continues to underpin the euro-area expansion”
  • The ECB “stands ready to adjust all of its instruments as appropriate” to meet its goal of sustained inflation just below 2 percent over the medium term.
  • Governing Council didn’t discuss when interest rates will rise and didn’t discuss the specific timeframe for bond reinvestments. The council is “reflecting” on possibilities for a new round of longer-term loans to banks