Thursday 24 May 2018

European Central Bank: Governments must do more to help economy

The European Central Bank
The European Central Bank

The European Central Bank (ECB) has left its stimulus measures on hold and warned governments in the 19-country euro currency union that they need to do more to help the economy grow and push up inflation to healthier levels.

The bank kept its key interest rates unchanged and decided against extending the duration of its existing bond-buying stimulus programme.

Bank President Mario Draghi seemed relatively confident about the economy and less inclined to hint at more stimulus than some analysts had expected.

Instead, he used his news conference to urge governments to do their part.

He said that implementation of "structural reforms" - that is, steps to make economies more business and growth-friendly - "needs to be substantially stepped up to reduce structural unemployment and boost potential output growth".

He added that eurozone governments that have the capacity to spend more on investments in infrastructure should do so. He said in particular that Germany, the eurozone's biggest economy, "has fiscal space" to act.

Mr Draghi's urgings have so far largely been ignored by governments, led by Germany, that have tended to focus instead on reducing deficits. They have also been slow to heed calls to cut bureaucracy and special protections for favoured professions and trades.

In his effort to underline governments' responsibilities, Mr Draghi read from this week's joint statement issued by the Group of 20 most advanced nations in which they said they were ready to use "all policy tools - monetary, fiscal and structural" to improve growth.

"What the ECB can do is to flag what is needed for monetary policy to be even more effective," Mr Draghi said. He added that the G20 statement represented governments, not central bankers, calling it "quite a powerful statement of commitment."

Several analysts said that despite Mr Draghi's more confident tone, the ECB would eventually have to take more stimulus action at its October or December meetings.

"Price pressures remain extremely weak and if growth continues at slow quarterly rates of 0.3% or less, as the business surveys now suggest, the ECB will struggle to meet its medium-term inflation goal," Jennifer McKeown, senior European economist at Capital Economics, wrote in a research note.

One reason to wait may be the need for time to plan an expansion of the kinds of financial assets the ECB can buy as part of its bond-buying stimulus programme. There are concerns that the programme may run out of high-quality government and corporate bonds to buy.

The central bank faces stubbornly low annual inflation of only 0.2% despite pumping one trillion euros (£846 billion) in newly printed money into the banking system through bond purchases since March, 2015. The purchases, made at a rate of 80 billion euros a month, are set to continue at least through March, 2017 or until inflation convincingly picks up.

The bank left that earliest end date unchanged. Some analysts thought the bank might commit to a longer programme.

The central bank's 25-member governing council also left its benchmark rate at zero and its rate on deposits from commercial banks at minus 0.4%.

The ECB's decision to hold off more stimulus saw European stocks dip, while the euro rose, gaining 0.2% on the day to 1.1265 dollars.

Mr Draghi seemed relatively confident about the eurozone's modest recovery, saying the bank's outlook was for growth "at a moderate but steady pace." He also said the bank's low rates were being more effectively transmitted through the banks and credit markets, meaning more effective stimulus.

The ECB staff's economic estimates showed inflation is expected to increase only gradually. They trimmed their inflation projection for next year to 1.2% from 1.3%, but left its outlook for 2018 unchanged at 1.6%. That indicates it sees itself getting gradually closer to its goal of just under 2% over the longer term.

While the eurozone is enjoying moderate growth, inflation continues to lag well below target, despite a raft of stimulus measures, and unemployment is high at 10.1% and falling only slowly.

Added uncertainty about future growth has come from the British vote June 23 to leave the European Union and its tariff-free trade zone. Britain would have to renegotiate its trade conditions with the EU over several years, and no one can say now how things will turn out. So far, economic data do not suggest a major impact.


Press Association

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