MNI POLICY: Convergence Delayed, Not Derailed - Draghi

By Luke Heighton

     FRANKFURT (MNI) - The drivers of the eurozone's expansion remain in place,

ECB President Mario Draghi said in a speech on Wednesday, blaming a loss of

momentum that began in 2018 mainly on global uncertainty.

     "The domestic economy has remained relatively resilient," Draghi said.

     Here are key points from his speech in Frankfurt:

     --"We are now seeing a more persistent deterioration of external demand,"

Draghi said. "But a soft patch does not necessarily foreshadow a serious slump."

     --ECB analysis suggests that external demand has not yet spilled over

significantly into domestic demand, "but the risks have risen in the last months

and uncertainty remains high. This is why our medium-term outlook remains that

growth will gradually return to potential, but the risks remain tilted to the

downside," Draghi said.

     --Market-based measures of inflation expectations have edged down recently,

but have "mainly been driven by a decline in inflation risk premia, not by a

drop in 'genuine' inflation expectations. We therefore remain confident that the

sustained convergence of inflation to our aim has been delayed rather than

derailed."

     --In contrast to the U.S., Draghi said, "the structural conditions for

pass-through from wages to prices remain in place in the euro area. What appears

to be delaying the pass-through today is the fact that firms are absorbing

labour cost increases by squeezing profit margins. Moreover, even if the economy

were to slow more than expected, the risks to wage growth may be contained."

     --"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."

     --Should there be further delays in inflation convergence, Draghi said,

"just as we did at our March meeting, we would ensure that monetary policy

continues to accompany the economy by adjusting our rate forward guidance to

reflect the new inflation outlook. We are not short of instruments to deliver on

our mandate."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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