Mario Draghi talks down eurozone recovery

ECB president 'cautious' about growth as he seeks to send dovish message on rates
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The Independent Online

The president of the European Central Bank, Mario Draghi, yesterday moved to dampen enthusiasm about the health of the eurozone despite the 17-nation bloc's emergence from recession earlier this year.

"I'm very, very cautious about the recovery. The shoots are very green," Mr Draghi said at his monthly press conference in Frankfurt. The Italian central banker added: "Risks continue to remain to the downside."

The ECB left its main refinancing rate on hold yesterday, and Mr Draghi signalled that he would be prepared to take action if money markets were to continue to tighten across the eurozone, jeopardising growth.

"We will remain particularly attentive to the implications that these developments may have to the stance of monetary policy" he said.

Like the Bank of England, Mr Draghi is trying to make it clear to financial markets that he will keep base rates low until the recovery is firmly established.

He said yesterday that monetary policy would "remain accommodative for as long as necessary". Mr Draghi's comments sent the euro about half a cent lower against the dollar to $1.31, a six-week low.

The ECB also yesterday forecast that the eurozone economy would decline by 0.4 per cent in 2013, having estimated a 0.6 per cent decline in June. But the central bank downgraded its 2014 forecast from 1.1 per cent previously to 1 per cent.

The eurozone emerged from an 18-month recession in the second quarter of 2013, with GDP growth of 0.3 per cent, but unemployment across the bloc remains at 12.1 per cent. In some of the peripheral states such as Spain and Greece, more than a fifth of the workforce is unemployed.

Meanwhile, the Bank of England fulfilled the expectations of City traders yesterday by keeping its monetary stimulus programme on hold, despite a tightening of UK money market rates in recent months.

The new Governor, Mark Carney, said last week that the Bank would consider injecting more stimulus into the economy if financial conditions tightened and posed a threat to the recovery. But the Monetary Policy Committee refrained from adding to its £375bn gilt purchase programme.

Like the ECB, the MPC also kept interest rates at their historic lows of 0.5 per cent. The Bank has said it will keep the base rate at this level until unemployment falls to at least 7 per cent of the workforce, something it does not anticipate occurring until the second half of 2016.

But traders are pricing in a rate rise earlier than this, with many believing that a hike will come by the middle of 2015.

Ten-year gilt yields have also been steadily rising since Carney unveiled his policy of "forward guidance" on rates last month. Yesterday they climbed above 3 per cent for the first time since July 2011, although the Bank is more concerned with shorter-term money-market rates.