Euro zone growth

The Pak Banker - - FRONT PAGE -

Re­cently, the Euro­pean Cen­tral bank raised its euro zone growth fore­casts from this year through to 2019 and nudged up its ex­pec­ta­tions for in­fla­tion, now seen at 1.7 per­cent in 2020, close to its tar­get of al­most 2 per­cent. At the same time, the ECB has de­cided to keep money pump­ing into the euro zone econ­omy for as long as needed, de­spite op­po­si­tion from some rate set­ters and in­creased growth and in­fla­tion fore­casts for the area. But it has kept its in­ter­est rates at rock bot­tom and also held rigidly to its script on what it plans for next year in as­set pur­chases.

From re­li­able sources it has been learned that pres­sure from some pol­i­cy­mak­ers to sig­nal a pos­si­ble change of plan was re­buffed as, in the opin­ion of ECB Pres­i­dent Mario Draghi and his col­leagues, things are look­ing up and the" re­vi­sion of the macroe­co­nomic pro­jec­tions is go­ing in the right di­rec­tion." Speak­ing to the me­dia, Draghi ex­plained: "An am­ple de­gree of mone­tary stim­u­lus re­mains nec­es­sary." The over­all EU econ­omy is in a re­cov­ery mode and all in­di­ca­tors are up, in­clud­ing man­u­fac­tur­ing, ex­ports and con­sump­tion. Th­ese are sure signs of progress.

How­ever, bet­ter-than-ex­pected growth and, to a lesser ex­tent, in­fla­tion are giv­ing fresh am­mu­ni­tion to crit­ics of the ECB's 2.55 tril­lion euro ($3 tril­lion) bond-buy­ing pro­gramme, such as Dutch cen­tral bank gover­nor Klaas Knot. In­deed, two cen­tral bank chiefs have spo­ken to the me­dia dis­clos­ing that a mi­nor­ity of ECB rate-set­ters at a re­cent meet­ing de­manded that the ECB may change its easy-money pledge if euro zone in­fla­tion keeps ac­cel­er­at­ing. Their sug­ges­tions in­cluded drop­ping a pledge to con­tinue to buy bonds un­til in­fla­tion con­verges to the ECB's tar­get or the op­tion to in­crease pur­chases if the out­look wors­ens.

Some ex­perts say that if in­fla­tion con­tin­ues to in­crease, the Bank will be forced to change the pol­icy of for­ward guid­ance. But most rate-set­ters opted to sim­ply re­peat the ECB's plan to keep buy­ing bonds at least un­til Septem­ber and to keep rates at record lows well af­ter that. But Draghi thinks that the quan­ti­ta­tive eas­ing as­set-buy­ing scheme has not yet "run its course" as thought by some peo­ple. Draghi said that he was con­fi­dent that the in­fla­tion tar­get could be reached and he saw no neg­a­tive ef­fect from tight­en­ing by the U.S. Fed­eral Re­serve, which an­nounced its third rate hike of 2017.

Hav­ing faced five years of neg­a­tive price pres­sures, the ECB has de­ployed its en­tire pol­icy ar­se­nal, cut­ting rates into neg­a­tive ter­ri­tory, giv­ing banks cheap loans and soak­ing up bonds with an un­prece­dented 2.55 tril­lion eu­ros ($3 tril­lion) of pur­chases. Its work has paid off as the euro zone re­cov­ery is now well into its fifth year thanks to nine mil­lion new jobs, let­ting pol­i­cy­mak­ers curb stim­u­lus from next year and rais­ing the prospect that the lav­ish bond buys it started in early 2015 could fi­nally end.

Draghi's words have left the mar­ket in no doubt the ECB is in no rush to curb stim­u­lus, giv­ing fur­ther im­pe­tus to con­sump­tion and growth. In the present cir­cum­stances, it will be some time be­fore the ECB will con­sider any change in mone­tary pol­icy sup­port. Nonethe­less, in the pres­ence of an ex­pan­sion which is gain­ing mo­men­tum, ECB's con­fi­dence to­wards the fi­nal ob­jec­tive is in­creas­ing. In the fi­nal anal­y­sis, the euro zone econ­omy is mak­ing steady progress and full re­cov­ery is only a mat­ter of time. Only then will the bonds pur­chase scheme be brought to an end.

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