ECB raises in­fla­tion fore­cast amid re­cov­ery

The China Post - - INTERNATIONAL - BY DAVID MCHUGH

The Euro­pean Cen­tral Bank (ECB) raised on Wed­nes­day its fore­cast for in­fla­tion this year to 0.3 per­cent from zero pre­vi­ously, an­other sign that the risk of crip­pling de­fla­tion — a long- term drop in prices — may be fad­ing.

ECB Pres­i­dent head Mario Draghi made the an­nounce­ment at a news con­fer­ence Wed­nes­day af­ter the bank’s gov­ern­ing coun­cil de­cided to hold its key in­ter­est rate at a record low of 0.05 per­cent.

The bank is push­ing 1.1 tril­lion eu­ros ( US$ 1.2 tril­lion) of mon­e­tary stim­u­lus into the econ­omy through 60 bil­lion eu­ros in monthly pur­chases of gov­ern­ment and cor­po­rate bonds with newly printed money.

The aim of the stim­u­lus is to raise in­fla­tion closer to the ECB’s goal of just un­der 2 per­cent. Very low in­fla­tion has raised fears of long-term stag­na­tion in the cur­rency union. Low in­fla­tion is a sign of weak de­mand and can make it harder for in­debted gov­ern­ments and con­sumers to re­duce their debt bur­dens.

Pre­lim­i­nary signs sug­gest the pro­gram is work­ing, as prices rose 0.3 per­cent in the year to May af­ter be­ing flat in April. Still, Draghi sought to dis­pel any sug­ges­tion that a bright­en­ing eco­nomic pic­ture could lead the bank to pre­ma­turely scale back the bond pur­chases be­fore the full 1.1 tril­lion euro goal is ac­com­plished in Septem­ber 2016.

He stressed Wed­nes­day that the bank was in­tent on “full im­ple­men­ta­tion” of the pro­gram. He said the bank’s mea­sures “will sup­port fur­ther im­prove­ments” in the avail­abil­ity of fi­nanc­ing for busi­nesses and con­sumers. That stim­u­lates eco­nomic ac­tiv­ity.

The eu­ro­zone econ­omy grew 0.4 per­cent in the first quar­ter, an im­prove­ment as the cur­rency union strug­gles to work off a cri­sis over too much gov­ern­ment and bank debt. But un­em­ploy­ment re­mains high at 11.1 per­cent. Econ­o­mists say stronger growth is needed to bring the long-term un­em­ployed back into the la­bor force.

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