ECB sticks to its su­per-easy money pol­icy

Slug­gish pace of struc­tural re­form in EU damp­ens growth

The Star Early Edition - - LETTERS - Francesco Canepa and An­dreas Framke

THE EURO­PEAN Cen­tral Bank (ECB) 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 euro-zone’s re­cov­ery to take firm hold.

With growth slowly pick­ing up pace, the ECB kept its var­i­ous rates at next to noth­ing or even 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.

“Eco­nomic growth in the euro area is ex­pected to be damp­ened by the slug­gish pace of struc­tural re­form,” Draghi told a news con­fer­ence, in­sist­ing a “very sub­stan­tial de­gree” of mon­e­tary pol­icy stim­u­lus was still re­quired.

“Be pa­tient – as the re­cov­ery firms up, real rates will go up,” he added in a re­mark aimed at crit­ics, no­tably in Ger­many, who have said the ECB’s poli­cies had eroded the wealth of savers and al­lowed weaker economies to get away without real re­form.

The euro fell to a day low of $1.0607 (R14.33) after Draghi said 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 an up­ward trend.

While Draghi warned that global risks to the euro-zone econ­omy were still slanted to the down­side, he said that it was still too early to as­sess what im­pact Bri­tain’s planned exit from the EU 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 in­creases lend­ing rates, un­der­scor­ing the 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, euro-zone busi­ness growth was the fastest in more than five years in De­cem­ber, or­der books are surg­ing on ex­port de­mand and con­sump­tion is hold­ing up, de­spite ris­ing 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.

The mar­ket eu­pho­ria after Don­ald Trump’s sur­pris­ing US elec­tion win is also yet to be backed up by con­crete pol­icy ac­tion and the threat of more pro­tec­tion­ist poli­cies from the US and pos­si­bly Bri­tain could re­verse mar­ket sen­ti­ment.

The ECB last month agreed to cut its as­set buys by a quar­ter from April, but ex­tended the €2.3 tril­lion (R33.2 tril­lion) scheme, known as quan­ti­ta­tive eas­ing, un­til the end of the year, promis­ing sub­stan­tial ac­com­mo­da­tion and ex­tended mar­ket pres­ence.

The ex­ten­sion threat­ens to reignite ten­sions be­tween the bank and Ber­lin, par­tic­u­larly as Ger­many heads to­wards an elec­tion in the au­tumn and with Fi­nance Min­is­ter Wolf­gang Schaeu­ble of­ten point­ing the fin­ger at the ECB for prob­lems. – Reuters


The pres­i­dent of the Euro­pean Cen­tral Bank, Mario Draghi, says the bank’s stance will not change for some time.

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