ECB sticks to its super-easy money policy
Sluggish pace of structural reform in EU dampens growth
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.