Eurozone's economic recovery remains strong, but inflation is yet to show a sustained upward trend, and the European Central Bank's decision in October to reduce the size of asset purchases and continue them for another nine months will ensure that the economy is supported by the right amount of monetary stimulus, ECB President Mario Draghi said Monday.
"The re-calibration of our policies for the period beyond the end of this year is meant to preserve the degree of monetary stimulus that is still necessary to secure a sustained return of inflation rates towards levels below, but close to, 2 percent in the medium term," Draghi said at a hearing of the European Parliament's economic and monetary affairs committee in Brussels.
Late October, the ECB said the size of its monthly asset purchases will be halved to EUR 30 billion at the start of next year, but they will continue for nine months.
The bank opted the "lower for longer" style of tapering for a second time this year and many hope this would be the beginning of the end of ultra-easy monetary policy since the 2007-08 global financial crisis.
"The economic expansion remains solid and broad-based across countries and sectors in the euro area, mainly supported by domestic demand," Draghi reiterated.
The labor market is also benefiting from the recovery as the severe employment losses suffered during the crisis have been offset, he said.
Employment gains and rising household wealth are supporting private consumption and business investment is being boosted by better corporate profitability, Draghi said.
However, inflation dynamics have yet to show convincing signs of a self-sustained upward trend, the ECB chief said. Given the significant labor market slack, underlying inflation pressures remain subdued, he added.
"The improvements in labor markets that we have observed still need time to translate into more dynamic wage growth," Draghi said.
The bank's policy to maintain the stock of its securities holdings and continue to re-invest the redemption proceeds for an extended period of time has become more important as the size of that portfolio has grown, he stressed.
Further, Draghi said the sequenced ordering of the outlook for the ECB's net asset purchases and the policy rate path is a central element of its monetary policy at present.
"The "well past" condition that governs the policy rate horizon lays out a critical enabling factor for asset purchases to have their full impact," Draghi said.
by RTT Staff Writer
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