Mario Draghi says ECB still on track to hit inflation target

Mario Draghi says ECB still on track to hit inflation target

Central bank head ‘confident’ because of the strong labour market

Mario Draghi has said the European Central Bank is still confident that it is on track to hit its inflation target — despite a raft of bad data — due to the resilience of the labour market.

The ECB president hinted that the bank’s governing council could look to offset the impact of its policy of negative interest rates, which banks blame for weakening profitability.

“If necessary, we need to reflect on possible measures that can preserve the favourable implications of negative rates for the economy, while mitigating the side effects, if any,” he said.

At present, the bank charges a 0.4 per cent levy on a portion of reserves parked at the region’s central banks as part of the negative rates policy. Some council members, such as Banque de France governor François Villeroy de Galhau, have called for the policy of negative rates — introduced in 2014 — to be reviewed. Any change would likely result in the bank phasing out negative rates before it raises the benchmark main refinancing rate, or introducing a tiered system of deposit rates.

Mr Draghi said in Frankfurt on Wednesday that convergence towards the target for inflation of below but close to 2 per cent “has been delayed rather than derailed”.

Unlike in the US, where stronger growth has not fed through into higher wages, the eurozone’s workers were seeing a stronger rise in pay due to lower unemployment. These higher wages would lead to stronger price rises once the current shock to the region’s economy — a result of weak global demand and political uncertainty — dissipated.

The bank president‘s optimism comes amid further signs that the woes of the region’s manufacturers continued into the first quarter of this year. The latest indices of purchasing managers signalled that manufacturing activity was now shrinking in several key economies — including the region’s economic powerhouse, Germany.

Slower growth tends to lead to lower inflation because of weakening demand. The ECB sees inflation remaining below its target, at 1.6 per cent, until 2021. The euro was little changed against the dollar in early trading.

The euro was little changed against the dollar in early trading.