ECB’s governor Draghi says bank’s stimulus still needed

Europe’s recovery still faces risks from unexpected political turbulence

FRANKFURT, Germany, April 6, (AP): European Central Bank head Mario Draghi insisted Thursday that the bank’s massive stimulus efforts are still needed even though the 19-country eurozone’s economy is strengthening.

“The recovery is progressing and now may be gaining momentum,” Draghi said in a speech at a conference at Frankfurt’s Goethe University.

He cautioned, however, that much of the improvement depended on the ECB’s monetary stimulus efforts and that it was “too soon to declare success.”

Draghi’s stance on keeping stimulus in place contrasts with that of the US Federal Reserve, which has already started withdrawing monetary stimulus by raising benchmark interest rates off their lows near zero. Minutes of the Fed’s last meeting, released Wednesday, showed officials were considering reducing their large bond holdings sooner than expected, a step that could eventually mean higher market interest rates. The Fed can do that because the US economic recovery is farther along and unemployment has fallen to lower levels than in Europe. The ECB has said it intends to continue its main stimulus program — which pushes newly printed money into the eurozone economy through bond purchases — at least through the end of the year. It has also kept its key interest rate benchmark at a record low of zero. Both steps aim to raise inflation and increase credit to businesses so they can expand and hire people.

A raft of recent economic data has stoked speculation that the ECB might start withdrawing its stimulus efforts earlier than planned. Surveys suggest that the eurozone may have grown as much as 0.6 percent in the first quarter from the previous three-month period, while official figures have shown inflation rising sharply from near zero to 1.5 percent in March, which is closer to the bank’s goal of just under 2 percent. Unemployment has also fallen but remains high at 9.5 percent, with sharp differences between member countries.

Bringing an end to the stimulus efforts could have wide-ranging consequences for markets, companies and consumers. It would likely mean an end to unusually low borrowing costs for governments and financially solid companies. It would also remove support for bond prices and might mean higher returns for savers, who currently get very little, if anything at all, on conservative holdings such as bank deposits.

Europe’s recovery still faces risks from unexpected political turbulence in Europe and elsewhere. Anti-EU candidate Marine Le Pen could seek to take her country out of the euro if she wins the French presidency in June. US President Donald Trump has raised uncertainty about global trade conditions by vowing to review existing agreements such as the North American Free Trade Agreement, saying they have disadvantaged US companies and workers.

The political risks lead analysts to think that the ECB will not signal a stimulus exit is on the way until after the French elections at the earliest. Draghi has said bond purchases would not end abruptly but would likely be tapered off over a period of months.