2018.11.1607:00:00UTC+00ECB's Draghi Hints At Possible Inflation Slowdown

Eurozone's growth would continue at a gradual pace, but there was a chance that core inflation may be slow in picking up in future, if uncertainty regarding the economic situation persisted, European Central Bank President Mario Draghi warned on Friday.

"There is certainly no reason why the expansion in the euro area should abruptly come to an end," Draghi said in a speech at the Frankfurt European Banking Congress.

"That said, if firms start to become more uncertain about the growth and inflation outlook, the squeeze on margins could prove more persistent," he said.

"This would affect the speed with which underlying inflation picks up and therefore the inflation path that we expect to see in the quarters ahead."

Euro area economic growth halved in the third quarter to 0.2 percent from 0.4 percent in the previous three months, latest estimates from the Eurostat showed this week.

Inflation accelerated to a near six-year high of 2.2 percent in October, exceeding the ECB's target of "below, but close to 2 percent", and core price growth climbed to 1.1 percent.

Draghi asserted that the ECB hopes to end its EUR 2.6 trillion-worth of net asset purchases in December, subject to incoming data. However, there is an increase in uncertainties surrounding the medium-term outlook, he noted.

"When the latest round of projections is available at our next meeting in December, we will be better placed to make a full assessment of the risks to growth and inflation," the ECB President said. The bank is widely expected to hike its interest rates in the second half of next year, which would be the first increase since 2011. The ECB chief noted that the nature of ECB's forward guidance is contingent on economic developments and therefore acts as an automatic stabiliser.

"If financial or liquidity conditions should tighten unduly or if the inflation outlook should deteriorate, our reaction function is well defined," he said.

"This should in turn be reflected in an adjustment in the expected path of future interest rates."

Draghi has opened the door for a long period of low interest rates, ING Bank economist Carsten Brzeski said, adding that the ECB president slightly changed the well-known ECB communication.

"Draghi at least just sent a clear signal of the ECB's willingness to err on the side of caution when it comes to the first rate hike," Brzeski said.

"The risk that Draghi could go down in European history books as the first ECB president who never hikes rate is increasing."

Citing the lags between wages and prices after a period of low inflation, patience and persistence in monetary policy is still needed, Draghi said. Further, he said trade risks need to be monitored "very carefully" over the coming months. "However, we still see the overall risks to the growth outlook as broadly balanced, in large part because the underlying drivers of domestic demand remain in place," Draghi said.

Regarding the risks to financing conditions, Draghi said, "Lack of fiscal consolidation in high-debt countries increases their vulnerability to shocks, whether those shocks are autonomously produced by questioning the rules of EMU's architecture, or are imported through financial contagion."

"So far, the rise in sovereign spreads has been mostly restricted to the first case and contagion across countries has been limited," he added.