Loose ECB policy drives recovery, Draghi claims

The eurozone economy is on track for a recovery this year driven by the ECB’s loose monetary policy and demand from abroad, according to the bank’s president Mario Draghi.

The ECB cut interest rates to a new record low last month and said it would act again if necessary. Its hand may — in part — be stayed this month and going forward by a rebound in inflation, which rose back to 1.4% in May from 1.2% in April.

That is still way below the bank’s roughly 2% target and unemployment in the eurozone reached a fresh high in April of 12.2%, fuelling further calls for policymakers to do more to help the economy.

“The economic situation in the euro area remains challenging but there are a few signs of a possible stabilisation, and our baseline scenario continues to be one of a very gradual recovery starting in the latter part of this year,” Mr Draghi said in a speech at the International Monetary Conference in Shanghai.

After the ECB’s last policy meeting a month ago, the bank said economic activity should stabilise and recover gradually. The bank meets again on Thursday to discuss rates.

Ahead of a court hearing in Germany later this month on complaints about the ECB’s new government bond purchase programme, dubbed Outright Monetary Transactions, Mr Draghi spent much of his speech defending the initiative.

He said the threat of the ECB buying bonds had played a key role in calming financial markets, from which “virtually all economic agents, including corporations, banks and households” were benefiting.

“Nevertheless, vulnerabilities remain,” he said.

Calmer markets have given governments more breathing space to adjust and last week, the European Commission announced that several countries would have more time to meet deficit targets.

But Mr Draghi urged governments to stick to their reform paths.

“To inspire confidence, policymakers must follow through with their fiscal reform agenda,” he said.

“In fact, little would be gained from a loosening of fiscal adjustment today if it creates market expectations that additional tightening will become necessary tomorrow.”