Weekly Market Outlook

Draghi Points to 2019 as Time for Inflation Mission Accomplished

Inflation in the euro area should return to the European Central Bank’s target by early 2019 at the latest, ECB President Mario Draghi said.

“Our inflation rate will pick up during the course of 2017, and then will continue moving in 2018 toward the objective which is close but below 2 percent,” Draghi said on Saturday at a press conference during the annual meeting of the International Monetary Fund in Washington. “This is predicated on maintaining the extraordinary support of our monetary policy.”

While the Frankfurt-based ECB hasn’t met its own definition of its mandate on inflation since early 2013, an unprecedented wave of stimulus measures during Draghi’s tenure including the current asset-purchase pace of 80 billion euros per month ($90 billion) has helped keep the currency bloc away from outright deflation. Draghi’s comments imply that fresh staff forecasts due in December — which build-in the impact of current stimulus — will show a 2019 inflation rate in line with the goal.

Achieving that target would mark the end of Draghi’s fight against the euro area’s stubbornly low inflation after more than six years. The ECB has deployed negative rates, asset purchases and cheap long-term loans to banks to rein in inflation.

Action Ready

The December round of staff forecasts may serve as the basis for a decision on whether the ECB intends to continue its quantitative easing program at the current rate beyond the end date in March 2017, whether the program will be wound down gradually after that, or if it could be stopped completely. That said, Draghi underlined that the ECB is ready to act if the path of inflation disappoints.

“The Governing Council continues to monitor closely the possible presence of second round effects produced by the fact that inflation has been so low for such a long time and could get ingrained in wage negotiations,” Draghi said. “We have no firm evidence of anything like that at this point in time but we continue monitoring the situation.”

The next few months of the ECB’s existing stimulus program are likely to be characterized by the debate over how the central bank will adapt it to potential scarcity of assets in some market segments. In September, Draghi tasked technical committees of the central bank to examine options to ensure the current program can be maintained at the full rate.

Implementation Focus

“We are completely focused on implementation,” Draghi said in Washington. He took the opportunity to remind euro-area governments that the ECB policies give time for economic reforms to be undertaken. Draghi presented a list of measures that countries with fiscal space — such as Germany — could do to boost productivity, including investment in education, technology and infrastructure.

While Draghi was moderately upbeat about the outlook for the euro area, he warned that the full impact of the U.K.’s decision to leave the euro area may not have fully unfolded.

“The event is very significant; to think it won’t have any consequences is perhaps asking for too much,” he said.