ECB’s Draghi admits growth prospects dimmed, cuts 2017 GDP forecast
Europe has lost some growth momentum and bond market volatility is here to stay, the European Central Bank said on Wednesday, pledging to see through its money printing scheme until its job of lifting the economy is done.
In remarks after the bank left rates on hold at record lows, ECB president Mario Draghi also urged a deal with Greece, which is facing default without aid, in order to keep it in the currency bloc.
In what may be seen as a concession, Draghi said the eventual deal, now under negotiation, should take into account Greece’s economic decline, particularly when setting fiscal targets that Athens argues are too demanding.
But he made it clear that the ECB would not tide over Greece’s finances in the meantime by loosening restrictions on short-term funding before euro zone backers first release loans.
“The Governing Council of the ECB wants Greece to stay in the euro zone,” Draghi told a news conference.
“The current downgraded growth perspectives of the Greek economy should be taken into account in determining what the appropriate budgetary surplus figures should be.”
Investment bank Barclays said the tone of Draghi’s comments, where he referred to ‘social fairness’, may signal a more conciliatory tone in the ECB’s stance.
“We think that Draghi’s choice of words in his response, including on ‘social fairness’, signals the willingness for Europe to also consider Greece’s needs,” Barclays said.
Still, edgy bond markets sold off on Draghi’s comment, anticipating a more reassuring message, and normally rock-solid German 10-year yields DE10YT=RR continued their climb.
They are up more than 30 basis point in two days, their biggest jump in years.
As analysts sought to explain Wednesday’s bond market move, JP Morgan said markets were overreacting to a slight increase in 2015 inflation forecast.
Draghi said the selloff in recent weeks was due to a range of factors and insisted the bank would look though the volatility.
“We should get used to periods of higher volatility,” he said. “At very low levels of interest rates, asset prices tend to show higher volatility.”
