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Draghi Confident Higher Pay Will One Day Fan Euro-Area Inflation

Carolynn Look
Mario Draghi, president of the European Central Bank (ECB), gestures during a news conference to announce the bank\'s interest rate decision at the ECB headquarters in Frankfurt, Germany, on Thursday, Oct. 20, 2016. The ECB kept its quantitative-easing program and interest rates unchanged as suspense builds up over a possible extension of bond-buying later this year.

Mario Draghi said falling unemployment will eventually spur inflation in the euro region, even if there’s little sign of that just yet.

The European Central Bank president has been frustrated by how little workers have managed to increase their pay, perhaps because they’re basing demands on the low inflation of the past few years or because they are more concerned about job security. Draghi on Monday argued many of the factors holding workers back are “transitory,” but that subdued inflation pressures highlight a need for further monetary support.

That migrants, women, and old people have increasingly managed to join the region’s workforce without driving up unemployment “suggests a very successful experience, and would suggest a stronger response in nominal wages -- but we’re not seeing it,” Draghi told European Parliament officials in Brussels.

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Employment in the 19-nation bloc is at a record high while joblessness has fallen to the lowest level since 2009. The participation rate -- which measures how many people are either employed or actively looking for work -- has risen 2 percentage points above the pre-crisis level, driven in particular by women and older people joining the workforce.

“We continue having signs that this recovery is continuing and the pace is continuing,” Draghi said. “We are confident that we will see changes in nominal wages that will drive underlying inflation.”

The region’s sweeping economic improvements in the last year have already inspired officials to pare back some support from January, even as Draghi notes that “inflation dynamics have yet to show convincing signs of a self-sustained upward trend.” 

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The ECB’s recalibration of its bond-buying program -- which will see monthly asset purchases reduced to 30 billion euros ($35 billion) from 60 billion euros next year -- should be seen as a sign of “growing confidence in the gradual convergence of inflation rates” with the ECB’s aim. Overall, low interest rates, quantitative easing, and other measures will ensure that policy will remain accommodative, he said.

“These measures will preserve the current financing conditions and ensure the ample degree of monetary stimulus that is still necessary for a sustained return of inflation rates towards levels that are below, but close to, 2 percent.”

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