Euro zone economy solid, but too early to declare victory, ECB’s Draghi says

ECB President Draghi gives a speech after receiving the Gold Medal of the Jean Monnet Fondation for Europe in Lausanne

By Balazs Koranyi

THE HAGUE (Reuters) – It is too early for the European Central Bank to declare victory in its quest to boost euro zone inflation despite signs the bloc’s economic recovery is strengthening, ECB President Mario Draghi said on Wednesday.

Draghi’s comments confirmed he is in no rush to raise interest rates or wind down the ECB’s 2.3 billion euro bond-buying program despite insistence from richer euro zone countries such as the Netherlands and Germany.

But he did hint at potential changes to the ECB’s ultra-loose policy message.

“Incoming data confirm that the cyclical recovery of the euro area economy is becoming increasingly solid and that downside risks have further diminished,” he told a hearing of the Dutch parliament.

“Nevertheless, it is too early to declare success. Underlying inflation pressures continue to remain subdued and have yet to show a convincing upward trend.”

The ECB is expected to tweak its policy message next month to reflect an improved economic situation but keep policy on hold.

Sources told Reuters last month some or all the references to prevailing downside risks to the outlook, to the possibility of further rate cuts or to larger asset purchases may be taken out.

“Some of the elements of our forward guidance are meant to address the tail risks of … inflation behavior,” Draghi told the Dutch parliamentarians.

“And to the extent that the balance of risk for growth gradually improves, also the probability of these tail risks become less and less.”

He added the ECB did not plan to change the rules of the bond-buying program to avoid the risk of running out of sovereign debt to buy in some countries, despite calls to do so by some of its policymakers.

Draghi said the benefits of the ECB’s monetary stimulus were outweighing its side effects, but acknowledged rising property prices and high household debt in some countries, including the Netherlands.

“We do not currently see compelling evidence of overstretched asset valuations at the euro area level, but we do see that real estate dynamics or high household debt levels in some countries signal the risk of increasing imbalances,” Draghi said.

“Such risks also exist in the Netherlands.”

(Additional reporting by Andreas Framke in Frankfurt; Writing by Francesco Canepa; editing by Jeremy Gaunt)