Monday 22 January 2018

ECB keeps the money flowing as inflation slows

ECB President Mario Draghi
ECB President Mario Draghi

Mark John

The European Central Bank retained its ultra-easy monetary policy stance in place on Thursday as inflation continues to undershoot its target but has explicitly acknowledged the gaining strength of the euro zone economy.

The ECB maintained its bias for further policy easing, leaving the door open to further rates cuts or an increase in asset buys. This is in line with market expectations but at odds with calls from Germany, the euro zone's economic powerhouse, for a gradual reduction of stimulus.

"Incoming data since our meeting in March confirm that the cyclical recovery of the euro area economy is becoming increasingly solid and that downside risks have further diminished," ECB President Mario Draghi told a news conference.

"At the same time, underlying inflation pressures continue to remain subdued and have yet to show a convincing upwards trend," he added, justifying the continued stimulus measures.

However, in response to a reporter's question, Mr Draghi noted there had been a debate among ECB council members over the eurozone growth outlook, with some "more sanguine" than others. That, he added, had resulted in a line being added to his introductory statement which noted that downside risks to the growth outlook "relate predominantly to global factors".

The euro weakened slightly against the dollar following the rates decision after trading near six-month highs, aided by expectations that Emmanuel Macron would win the French presidential vote on May 7.

The subtle tweak in language will be seen by some observers as foreshadowing a more bold change at the next meeting in June, possibly including a removal of a phrase signalling a bias for more policy easing.

Eurozone economic sentiment hit a 10-year high this month and political risk is receding after pro-euro centrist Mr Macron won the first round of France's presidential vote.

The eurozone is now on its best run since the global financial crisis.

Having missed its 2pc inflation target for years and even flirting with deflation, the ECB is buying €60bn worth of bonds per month at least until the end of the year and plans to keep interest rates in negative territory until later.

But economic growth is steadily picking up pace, inflation is comfortably above 1pc and the ECB's policy arsenal is nearly depleted, all fuelling calls by conservative policymakers to start mapping out the way to the exit.

Mr Draghi said that inflation was still not firmly in place, but that the risk of deflation had virtually disappeared.

In a departure from the bank's long-held, more pessimistic stance, ECB board member Benoit Coeure, a key ally of Draghi, last week argued that the balance of risk for the economy is now largely balanced.

(Reuters)

Irish Independent

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