ECB set to hold course in face of mounting pressure
We should not react to individual data points and shortlived increases in inflation. Mario Draghi, ECB president
FRANKFURT AM MAIN: The European Central Bank will maintain massive support for the eurozone economy as governors meet Thursday, analysts predict, despite growing evidence the health of the bloc is improving.
Inflation is close to the bank’s target, lending support to critics’ calls for the ECB to raise historic low interest rates and wind down its tens of billions of euros per month in government and corporate bond purchases.
Policies designed to boost growth and thereby inflation are no longer needed, opponents argue, and could be harmful if not revised.
ECB policymakers counter that the jump in eurozone prices since December is a temporary effect of increased energy prices.
“We should not react to individual data points and shortlived increases in inflation,” ECB president Mario Draghi told European Parliament lawmakers in February.
“Support from our monetary policy measures is still needed.”
Pointing to still-weak core inflation – excluding items like food and energy – the bank’s governing council agreed to “look through the volatility in short-term data” when deciding policy, according to minutes from its last meeting in January.
“The ECB will still be able to find justification for its ultraloose policy stance” this week, said economists Peter Nagle and Khadija Mahmood of the Institute of International Finance.
But the number of ‘hawks’ – advocates of less supportive monetary policy – around the council table may have grown, they add.
The ECB launched its ‘quantitative easing’ mass bond-buying programme in early 2015 after a scare over deflation – a self-sustaining downward trend in prices and wages.
Some two years into the scheme, “the significantly diminished risk of deflation reduces the argument” for continuing, Nagle and Mahmood wrote.
Inflation in the single currency area stood at 2.0 per cent in February, Eurostat figures showed last week, the first time since 2013 it has outstripped the ECB’s mandate of “close to, but below 2.0 per cent”.
Many analysts expect new ECB staff forecasts to include predictions of higher inflation across the whole year for 2017 – perhaps as high as 1.8 per cent, just shy of the target.
Nevertheless, “we expect Mario Draghi to recall that conditions for a durable adjustment of inflation are not gathered yet,” said Natixis bank economist Alan Lemangnen.
In January, Draghi said increased inflation would have to be consistent across the euro area, independent of the ECB’s support, not temporary, and foreseeable into the medium term for the bank to consider it ‘durable’.
Eliminating volatile oil and food prices shows a ‘core’ inflation figure stable at around 0.9 per cent in February – far short of the longterm target.
With critical elections in heavyweight eurozone nations France, the Netherlands and Germany in the coming months, the ECB will not want to add to financial market uncertainty by heading for the QE exit door. In December, policymakers decided to extend the deadline on mass bond-buying from March to the end of 2017, albeit slowing the pace by 20 billion euros per month to 60 billion (US$63.3 billion) from April.
But sunnier forecasts from the ECB’s staff “will allow Mario Draghi to assert that the economic outlook has improved, and that risks are now more balanced,” Natixis’ Lemangnen said.
That more positive outlook could be reflected in the bank’s “forward guidance”, carefully crafted statements about future policy.
The ECB has long suggested interest rates will “remain at present or lower levels for an extended period of time” – and certainly until after the bond-buying programme is wound down.
Higher interest rates are needed to manage a faster-growing economy with higher inflation.
So a change to that language suggesting that higher rates could be on the way would be an early indicator that the ECB sees the economic recovery on a firmer footing and is looking to cut back its stimulus programmes, analysts point out.
Board member Yves Mersch called for just such a change in early February – but has yet to be echoed by advocates of a more supportive policy like Draghi.