ECB enters 2017 in battle to hold steady course

FRANKFURT AM MAIN: The European Central Bank will not deviate from its ultra-loose monetary policy at its first 2017 meeting, analysts predicted, in the face of calls to tighten from critics alarmed by rising inflation.

Policymakers at the Frankfurt institution chose in December to keep interest rates at historic lows and extend mass bond-buying from March to December this year, albeit slowing the purchases from 80 to 60 billion euros (US$85 to US$64 billion) per month from April.

“Uncertainty prevails everywhere,” ECB president Mario Draghi said at his December 8 press conference.

The economic consequences of Brexit and the election of Donald Trump for the 19-nation eurozone are as yet unclear and a series of elections are on the agenda in France, Germany, the Netherlands, and possibly Italy.

“What central banks can do is to keep a steady hand, namely to continue with the monetary accommodation that is necessary to achieve their objective,” Draghi went on.

The ECB’s low interest rates, mass asset purchases, and cheap loans to banks are all intended to pump cash into the economy in a bid to power growth and push inflation towards the central bank’s target of close to, but below 2.0 per cent.

Since the Governing Council’s last meeting, when the most recent figures for November showed average inflation of 0.6 per cent across the eurozone, the picture has shifted.

Figures for December showed inflation in the single currency area stood at 1.1 per cent on average and at 1.7 per cent in its largest member economy, Germany.

Prominent economists and politicians in Germany – where savers fear their cash piles shrinking as inflation outstrips interest – responded by clamouring for a rate rise.

But one month of data will not be enough to convince Draghi it is time to change tack, said analyst Jesus Castillo of Natixis bank.

“Short term developments suggest that inflation is back,” he noted – but added that rising energy prices, rather than the economic recovery gathering pace, are driving the increases. — AFP