In ECB’s 2020 vision, inflation goal elusive
FRANKFURT AM MAIN: The European Central Bank upgraded its growth and inflation forecasts for the coming years but stood by its massive support to the economy, with President Mario Draghi saying it won’t reach its cherished price growth target by 2020.
“Even though the situation on growth has improved and will continue to improve... the news on inflation remains somewhat muted,” Draghi told journalists in Frankfurt after a gathering of central bank governors.
Growth is expected to hit 2.4 per cent in 2017, 2.3 per cent next year and 1.9 per cent in 2019.
The ECB fired off a broadside of policies in recent years to stoke price growth, offering cheap loans to banks, fixing interest rates at historic lows and buying tens of billions of euros in government and corporate bonds per month.
Such measures are designed to pump cash through the financial system and into the real economy of businesses and households, powering economic growth and inflation.
But price growth will slow from 1.5 per cent this year to 1.4 per cent in 2018, rising only to 1.7 per cent in 2020 – still short of the ECB’s target of 2.0 per cent, judged to be most favourable to growth.
That has encouraged the central bank to keep its support for the 19-nation single currency area in place.
It decided in October to slash its bond purchases by half from January, to 30 billion euros (US$35.4 billion) per month – but has left itself the option of extending the programme beyond a September 2018 deadline or increasing its monthly spend if inflation falls back.
“It seems as if the ECB still does not yet believe that strong growth will eventually translate into higher inflationary pressure,” ING Diba bank analyst Carsten Brzeski said.
The ECB’s decisions fell on the same day as the Bank of England left its key interest rate unchanged at 0.50 per cent as the British economy battles Brexit headwinds.
Meanwhile, the US Federal Reserve on Wednesday increased its key lending rate to 1.25-1.5 per cent as the labour market heated up, although inflation remains elusive there too.
Like other central banks, the ECB is puzzling over why rising growth and employment figures are not pushing up wages – the ‘linchpin’ of higher inflation, Draghi said earlier this year.
The eurozone clocked up 0.6-per cent quarter- on- quarter growth between July and September, and unemployment has fallen to 8.8 per cent – its lowest level since January 2009.
Nevertheless, price growth in the single currency zone hit just 1.5 per cent in November.
“The muted response of wages to improving conditions in the labour market... is way slower than we had in the past,” Draghi said Thursday. — AFP