FRANKFURT, Germany (AP) - The head of the European Central Bank indicated a first interest rate increase could be postponed if unexpected trouble strikes the 19 countries that use the euro as their currency.
Mario Draghi warned in a speech Friday the current economic expansion remains “resilient” as unemployment continues to fall and consumers remain willing to spend. But he cautioned that slowing world trade is proving to be a drag on the eurozone economy.
Draghi said the bank wasn’t changing its plan to phase out a 2.5 trillion-euro ($2.8 trillion) bond-buying stimulus program at the end of the year. But he indicated that the central bank could respond to unexpected weakness by putting off interest rate increases longer than planned.
The bank has in the past said that interest rates will remain at their current record lows until at least “through the summer” of 2019. Draghi on Friday added a caveat that that the schedule for interest rate increases “is contingent on economic developments.” He said that if economic conditions worsen, “our reaction function is well defined” - a signal that the bank could respond to unexpected trouble by delaying rate hikes beyond the fall of 2019.
“There is certainly no reason why the expansion in the euro area should abruptly come to an end,” Draghi said in a speech in Frankfurt. A gradual slowdown is normal as economic expansions mature, he said. He noted that the eurozone expansion is still “relatively short in length” at 22 quarters, compared to the average of 31 quarters for the five periods of growth since 1975.
And he said that recent weak economic growth figures have been affected by one-off factors such as strikes and disruption from carmakers failing to get vehicles certified under new emissions tests.
Draghi said the bank was sticking with its plan to phase out its bond purchase stimulus program the broader economy, at year-end. The purchases are a way of pushing newly created money into the banking system, and, it is hoped, the wider economy.
The bank’s benchmark interest rate for lending to banks is zero, and it imposes a minus 0.4 percent rate on deposits that it takes from commercial banks. The negative rate is a penalty aimed at pushing banks to lend excess funds rather than let them pile up at the central bank.
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