ECB expected to stick with its stimulus plan

Inflation has suddenly jumped in Europe. Growth is picking up. But don’t expect the European Central Bank to start withdrawing its extensive stimulus programs just yet.

This week, ECB president Mario Draghi is expected to lay out the reasons why the chief monetary authority for the 19-country eurozone intends to stick with its stimulus plan decided at the Dec. 8 meeting — to keep pumping newly printed money into the economy through bond purchases at least until the end of the year.

The bank isn’t expected to change its interest rates or other monetary stimulus measures when its governing council meets Thursday.

But Draghi will find he has some explaining to do to convince stimulus skeptics — particularly in Germany — who think it’s time to start looking to wrap up the measures. While they support the economy, the stimulus measures can lower returns on savings in investment and pension funds, an issue for many among Europe’s aging populations.

The first reason for Draghi not withdrawing stimulus is simple: The recent turn upward in inflation from near zero is mostly due to higher oil prices, not to rising wages or other fundamental pressures in Europe’s economy.

That means that the ECB doesn’t feel much closer to its goal of inflation of just under two per cent. December’s inflation reading came in at 1.1 per cent. The increase in oil prices may offer only a one-time boost. More importantly, so-called core inflation — which excludes fuel and food, where prices can rise and fall for short-term reasons — hasn’t budged over the past few months. It’s been stuck at 0.8 or 0.9 per cent. And that’s the figure the ECB keeps its eye on.

“There remain plenty of reasons for the ECB to remain cautious,” Marco Valli, chief eurozone economist, wrote in an emailed research note. “Overall, it would probably take very significant changes to the growth and inflation outlook for the ECB to re-think its policy setup announced last December.”

That’s not much comfort to savers in places like Germany, where the inflation rate has reached 1.7 per cent but returns on bank deposits remain near zero. That means the value of people’s savings shrinks over time — a constant risk with conservative investments, to be sure. A headline in Germany’s Frankfurter Allgemeine Zeitung called the recent inflation spike “an attack on our money.”

German Finance Minister Wolfgang Schaeuble was quoted as saying in the Sueddeutsche Zeitung daily that “I share the concerns” of savers, adding that financial advisers would recommend finding higher-yielding investments such as stocks for at least part of one’s savings: “We must accept that there are no real interest returns on risk-free investments.”