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January 20, 2017

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ECB keeps easy monetary policy flat

THE European Central Bank kept its super-easy monetary policy unchanged as expected yesterday and its President Mario Draghi told critics of his stimulus path to be patient and wait for the eurozone’s recovery to take firm hold.

With growth slowly picking up pace, the ECB kept its various rates at next to nothing or negative and asset buys at a record pace. It reaffirmed that rates would stay at their current or lower levels for an extended period and that it was also ready to increase or extend its bond purchases if the outlook worsens.

“The recovery of all of the eurozone is in the interests of everybody, including Germany,” Draghi told a news conference, responding to criticism, notably from Berlin, of his stimulus programme.

“German savers have benefited not only as savers but also as borrowers, as entrepreneurs, as workers, like all the other citizens of the eurozone. So we have to be patient. As (the) recovery will firm up, real rates will go up.”

Draghi described the current eurozone recovery as “dampened by the sluggish pace of structural reform” and insisted a “very substantial degree” of monetary policy stimulus was needed.

Draghi said that underlying inflationary pressures remained subdued and that, once the base effect of rising oil prices had been accounted for, there were still no real signs of a upward trend.

While Draghi warned that global risks to the eurozone economy were still slanted to the downside, he said it was too early to assess what impact Britain’s planned exit from the European Union and its single market would have.

The recovery still relies heavily on ECB stimulus and markets could become more volatile as the US Federal Reserve gradually raises rates, underscoring diverging policy paths between Europe and the US.

That said, inflation hit a three-year high last month, manufacturing activity is accelerating and confidence indicators are firming, all pointing to solid growth at the end of last year.

Indeed, eurozone business expansion was the fastest in more than five years in December, order books are surging on export demand, and consumption is holding up, despite increasing energy costs, all pointing to the sort of resilience not seen since before the bloc’s debt crisis.

But the underlying picture is mixed.

Inflation is still just half of the bank’s 2 percent target and the jump is mostly down to higher oil prices.


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