Draghi says confidence on inflation will help drive wage gains

[FRANKFURT] Mario Draghi predicted that euro-area workers will soon start winning bigger pay increases, relieving pressure on his European Central Bank to keep supporting the economy.

The ECB president, who has for years struggled to combat low inflation in the region, reiterated on Friday that a "key issue" keeping prices down is that wages aren't rising. But after pumping the economy with stimulus that has helped bring unemployment down and spur consumption, Mr Draghi sees a change underway.

"With well-anchored inflation expectations, the effects of past low inflation in wage formation should not be persistent," he told an audience of bankers and policy makers in Frankfurt. "As the labor market tightens and uncertainty falls, the relationship between slack and wage growth should begin reasserting itself. But we have to remain patient." The euro rose after the ECB chief's remarks, and was up 0.2 per cent at US$1.1793 at 10.20 am Frankfurt time.

His argument that workers are likely to ask for more pay now that prices are gradually picking up will be an important factor in pushing inflation closer to the ECB's goal. Officials have already decided to pare back some of their monetary support from the start of next year and Mr Draghi noted that economic growth in the region is "clearly improving," but he also warned that underlying price pressures trends remain "subdued".

"A sustained adjustment is one where the return of headline inflation toward our objective is durable and not just a temporary blip, and it can be self-sustained without monetary-policy support," Mr Draghi said. "We do now see inflation moving steadily away from the very low levels of recent years, although progress remains incomplete and partial." Mr Draghi's optimism on wage growth is fed by the region's labor-market recovery.

Employment in the 19-nation bloc is at a record high while joblessness has fallen to the lowest level since 2009. At the same time, the participation rate has risen 2 percentage points above the pre-crisis level, driven in particular by women and older people joining the workforce.

"The fact that unemployment has fallen so much while labor participation has been rising is a remarkable success story," Mr Draghi said.

The strengthening recovery was one reason why, at the ECB's most recent policy meeting on Oct 26, the Governing Council decided to halve the pace of its monthly bond purchases to 30 billion euros (S$48 billion) starting in January, while extending the program until at least September.

Mr Draghi said that decision "mechanically" helped reinforce expectations that interest rates will stay at current levels for a long time. As a result, the signaling effect of bond-buying has "naturally increased in prominence relative to the duration effect," he added.

Mr Draghi's comments follow a statement from ECB chief economist Peter Praet on Wednesday, who said that policy guidance will focus increasingly on interest rates as the end of quantitative easing nears.

BLOOMBERG