Mario Draghi has set out his intent for how the European Central Bank will raise interest rates, advocating a moderate series of rises after the bank ends its extraordinary stimulus measures.

A commitment to slow and cautious rises could set the path of ECB policy beyond the end of Mr Draghi’s term of office next year and lock his successor into his dovish monetary policy.

Mr Draghi reiterated on Wednesday in Frankfurt that the central bank would not raise rates until “well past” the end of its bond-buying programme, known as quantitative easing, which is expected by the latter stages of this year.

When rates did rise, the path would be “at a measured pace” that took into account continued uncertainty about the size of the output gap — how far the eurozone’s economic growth is short of its potential — and “the responsiveness of wages to slack”, Mr Draghi said.

The extent of the output gap is contested at the ECB. Some officials think it has closed as the eurozone enters a period of economic expansion. However Mr Draghi and others have argued that the gap is too difficult to measure and is therefore a poor guide to when to tighten monetary policy.

The ECB’s first interest rate rise is not expected until around the middle of 2019, well after the Federal Reserve and the Bank of England, which have already raised rates following the financial crisis.

Mr Draghi is due to leave the central bank at the end of October 2019. However, his successor would find it difficult to drop his commitment to “measured” rises should market expectations become cemented by the chief’s remarks.

At present the ECB’s benchmark main refinancing rate is zero and its deposit rate is minus 0.4 per cent, meaning banks have to pay to hold money at the ECB, a measure meant to prod them to lend more instead and thereby help encourage economic growth.

The ECB has promised to buy €30bn of bonds each month until September. After that, a three-month taper is expected to draw the €2.3tn QE programme to a close.

“The main tool for shaping the [monetary policy] stance will become the path of our key policy rates and forward guidance about their likely evolution,” Mr Draghi said. “Our forward guidance has assured in the past, and continues to assure today, stability to the short end of the curve. As such, our communication, and rate path itself, will be calibrated to ensure that inflation continues to evolve along a trajectory that is consistent with the sustained adjustment path.

“Adjustments to our policy will remain predictable, and they will proceed at a measured pace that is most appropriate for inflation convergence to consolidate, taking into account continued uncertainty about the size of the output gap and the responsiveness of wages to slack.”

The ECB president called for “further evidence” that prices are rising at a level consistent with the bank’s inflation target of below but close to 2 per cent.

In the meantime, he said, policy would “remain patient, persistent and prudent”.

However Mr Draghi signalled that wage growth was getting closer to where it needed to be to sustain low and steady inflation.

“The key issues we need to examine are wage dynamics, their pass-through to prices, and the possible risks to the inflation outlook,” Mr Draghi said. While “the adjustment of wages during the recovery has so far been atypically slow”, there were increasing signs that “the anchors for wage formation are gradually becoming more aligned with our inflation objective”.

“Backward-looking factors appear to be becoming less important, and the forward-looking anchor, inflation expectations, is strengthening,” he added.



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