Euro zone economic slack may be bigger than thought: ECB’s Mario Draghi

Dario Pignatelli | Bloomberg | Getty Images

Mario Draghi, president of the European Central Bank (ECB)

The factors slowing the rise of inflation will wane as growth continues and the traditional relationship between growth and inflation remains intact, even if their correlation has been weakened in recent years, Draghi told the European Parliament’s committee on economic affairs.

His comments suggest the ECB remains confident that inflation is finally on an upward trend, supporting market expectations for the bank to finally end its bond purchase programme this year, satisfied that inflation will eventually hit its nearly 2 percent target.

“Given the uncertainty surrounding the measurement of economic slack, the true amount may be larger than estimated, which could slow down the emergence of price pressures,” Draghi told a regular committee hearing.

“This is particularly visible in the labour market.”

“Nonetheless, these factors should wane as the economic expansion continues and unemployment further declines,” Draghi said. “Looking ahead, we anticipate that headline inflation will resume its gradual upward adjustment, supported by our monetary policy measures.”

ECB board member Benoit Coeure argued on Friday that the bank already holds enough bonds to keep borrowing costs low, an argument taken as further evidence that the ECB is preparing investors for the end of its unprecedented asset purchases.