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.

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.