ECB says stimulus is helping economy, pushing up inflation

AP News
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Posted: Jun 03, 2015 11:27 AM
ECB says stimulus is helping economy, pushing up inflation

FRANKFURT, Germany (AP) — European Central Bank head Mario Draghi said the bank's 1.1 trillion euro ($1.2 trillion) stimulus program is supporting the eurozone's modest recovery as the money works its way through the financial system to the real world of businesses and consumers.

Draghi was cautiously upbeat about the prospects of the 19-country currency union at a news conference Wednesday after the bank's latest policy meeting.

The ECB raised its inflation forecast for this year from zero to 0.3 percent, a sign the region is less at risk of suffering a long-term drop in prices that can cause the economy to stagnate.

The ECB's efforts have "contributed to a broad-based easing of financial conditions," Draghi said. "The effects of these measures are working their way through to the economy."

"We expect the economic recovery to broaden," he added.

Draghi cautioned, however, that Greece remains a concern and that governments' slow progress in reducing debt and making their economies more business-friendly were still acting as a weight on growth.

The eurozone economy grew 0.4 percent in the first quarter, an improvement as the currency union struggles to work off a crisis over high government and bank debt. And though unemployment is edging down, it remains high at 11.1 percent as of April. Economists say stronger growth is needed to bring the long-term unemployed back into the labor force.

Draghi said the improved outlook assumed that the bank would carry out the full measure of its stimulus program, which is technically called quantitative easing. The bank is pushing 1.1 trillion euros ($1.2 trillion) of newly created money into the economy through 60 billion euros in monthly purchases of government and corporate bonds.

The aim of the stimulus is to raise inflation closer to the ECB's goal of just under 2 percent. Very low inflation has raised fears of long-term stagnation in the currency union. Low inflation is a sign of weak demand and can make it harder for indebted governments and consumers to reduce their debt burdens.

Preliminary signs suggest the program is working, as prices rose 0.3 percent in the year to May after being flat in April.

The bond-buying stimulus has far-ranging impact. Perhaps most significantly, it has driven down the euro's exchange rate against the dollar, a boon for eurozone exporters but a headache for U.S. multinational companies that see their European earnings shrink in dollar terms. It should support prices for government bonds, giving other eurozone countries a financial buffer against any turmoil if the ongoing crisis in Greece results in the country defaulting on its debts or even leaving the euro.

Greece needs more bailout money from other eurozone creditor countries and the International Monetary Fund, but has balked at the painful conditions that would restrict government spending.

Draghi sought to dispel any suggestion that a brightening economic picture could lead the bank to prematurely scale back the bond purchases before the full 1.1 trillion euro goal is accomplished in September 2016. He stressed Wednesday that the bank was intent on "full implementation" of the program.

Draghi spoke after the bank's governing council decided to hold its key interest rate at a record low of 0.05 percent.

Meanwhile, a survey released Wednesday by financial information company Markit said concerns over Greece are acting as "a brake on growth" in the eurozone. Its purchasing managers' index - a broad gauge of business activity - for May fell to a 3-month low of 53.6 points from 53.9 the month before.

Draghi declined to answer questions about the ongoing negotiations over Greece's finances. The ECB is a key player in Greece's financial drama as it has been letting the country's banks tap emergency credit that they can't get elsewhere.

Draghi said the ECB "wants Greece to stay in the euro, but it has to be a strong agreement" that meets four key conditions. It has to promote growth, be socially fair, keep budget deficits under control and support financial stability.

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Pan Pylas in London contributed to this report.