Draghi: Brexit ‘clouds’ euro zone growth outlook

European Central Bank President Mario Draghi said Britain’s recent vote to leave the European Union “clouds” the medium-term outlook for growth in the eurozone.

Draghi spoke in Washington as the World Bank and International Monetary Fund wound up annual meetings, where popular resentment against globalization — typified by the Brexit vote in June — was a prominent topic.
“Many speakers have noted that the short-term effects of the outcome of the UK referendum were less dramatic than people expected,” he said.
“To think that there wouldn’t be any consequence would be probably to hope for too much,” said Draghi, noting that the consequences would depend on the length of time needed to finalize British secession from the EU.
“But certainly it’s another of these political uncertainties that clouds the outlook for growth.”
His remarks appeared to be an implicit acknowledgement that participants in the meetings had privately discussed the British pound’s “flash crash” against the US dollar on currency markets.
The pound dropped sharply Friday on Asian currency markets, losing 6 percent against the dollar before regaining some of the lost territory.
Draghi said that euro zone inflation could approach the ECB’s target by late 2018 or early 2019 and so far there is no evidence that super-easy monetary policy is leading to asset price bubbles.
Draghi added that he also saw no evidence that low inflation has become embedded in wage setting, a big fear for policymakers as low wage growth could perpetuate low inflation.
“By year end or the first months of next year, (inflation) should pick up and move toward 1 percent, and later on, above 1 percent, essentially due to the base effect of energy prices,” Draghi told a press conference.
“Thereafter the inflation rate would continue to increase... toward our objective to be reached by the end of the forecast horizon, 2018 or the beginning of the year after,” he added.
The ECB has undershot its inflation target of nearly 2 percent for three and a half years, raising concern that its policy may lose credibility as businesses and households lose faith in its policy moves, making its job even harder in the future.
Fighting the risk of deflation, the ECB has cut rates into negative territory, regularly offers banks free loans and already bought over 1 trillion euros of assets, hoping to boost lending, economic growth and in turn inflation.
Its big fear is that after years of inflation target misses, businesses lose confidence in its ability to deliver on its mandate, lowering the pace of their wage increases and embedding low income growth.
Draghi added that euro zone growth has appeared to stabilize and he sees growth holding steady at the current rate for the rest of the year.
Still, the outlook faces downside risks, primarily from geopolitical risk and lower-than-projected growth in world trade.
While admitting that its policies carry risks and negative side effects, Draghi said he saw nothing that could be characterized as asset price bubbles.

Source: Arab News