SINTRA, Portugal (Reuters) – The European Central Bank will exercise patience over its first interest rate hike and plans to adjust policy only gradually as uncertainty is on the rise and inflation needs to increase further, ECB President Mario Draghi said on Tuesday.
The ECB last week decided to end its 2.6 trillion euro bond purchase program by the close of the year but said interest rates would stay unchanged at least through next summer, a wording that pushed back rate hike expectations by three months to September.
“We will remain patient in determining the timing of the first rate rise and will take a gradual approach to adjusting policy thereafter,” Mario Draghi told an ECB conference in the Portuguese town of Sintra.
“The path of very short-term interest rates that is implicit in the term structure of today’s money market interest rates broadly reflects these principles,” he added.
The ECB targets inflation at just below 2 percent but has undershot this target for over five years, even as it has unleashed an unprecedented cocktail of unconventional measures to rekindle price growth.
While prices are now on the rise and the ECB sees inflation near its target by 2020, Draghi said uncertainly prevails, clouding the outlook for price growth.
“What is key is that inflation expectations remain well anchored,” Draghi said. “But uncertainty arising from economic developments lingers throughout the various stages of this process.”
He added that downside risks include the threat of increased global protectionism, rising oil prices and the possibility of persistent heightened financial market volatility.
While wages are on the rise, this would not automatically translate into higher inflation, Draghi said, questioning the traditional relationship between prices and earnings.
“Even if wages continue to rise as we expect, we cannot exclude that structural factors beyond the central bank’s control might impede the transmission of wages into consumer prices,” Draghi said.
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