ECB keeps stimulus on high even as economy picks up

AP News
Posted: Jan 19, 2017 10:56 AM
ECB keeps stimulus on high even as economy picks up

FRANKFURT, Germany (AP) — The head of the European Central Bank has warned there is still little sign of an enduring pick-up in shop prices and workers' wages in the eurozone — a symptom of economic weakness that means the bank will leave its stimulus programs running nearly full blast at least until year-end.

The bank's 25-member governing council led by President Mario Draghi made no changes in its interest rates or bond-buying stimulus program at a meeting Thursday.

Attention was focused on his news conference, where he stressed that the bank is determined to keep pumping newly printed money into the economy through bond purchases despite criticism from stimulus skeptics.

The purchases are aimed at boosting inflation from dangerously low levels and supporting an economy that's slowly gathering steam.

Draghi said there's no convincing sign yet of an upturn in inflation toward the bank's goal of just under 2 percent annually. That inflation rate is deemed best for a consistently strong economy — not too high and not too low.

A recent uptick in inflation in the eurozone, he said, was caused by higher oil prices — and not by a fundamental improvement in demand for goods in the economy.

"Underlying inflation pressures remain subdued," Draghi said.

Annual inflation in the 19-country eurozone jumped to 1.1 percent in December from 0.6 percent the month before. But core inflation, which excludes volatile fuel and food, has been stuck at 0.8 percent-0.9 percent, and higher prices aren't being reflected in wage growth.

The euro fell on Draghi's comments, from $1.0668 to $1.0604, as the prospect of more monetary stimulus can send a currency's exchange rate lower.

Draghi said the ECB's stimulus had helped create 4.5 million new jobs in the past three years. But he stressed the need for "a continued, very substantial degree of monetary accommodation," or stimulus.

He rejected criticisms from stimulus skeptics, particularly in Germany, who point to the zero returns on savings placed in bank deposits and other conservative investments. He said low rates would revive the economy and end the zero-rate environment.

"Low rates now are necessary to get to higher rates in the future," he said. "The recovery of the eurozone is in the interests of everybody, including Germany."

Economist Carsten Brzeski at ING-DiBa pointed to the line in the ECB's statement that stated it even stood ready to increase stimulus if needed. "Only once this sentence has been dropped," Brzeski said in a research note, will the ECB be ready to taper off its stimulus.

He said Draghi "elegantly tackled" German objections by pointing out that the recovery benefits everyone.

Nonetheless, the decision to keep going with unchanged stimulus was immediately criticized by economist Clemens Fuest, the head of Germany's Ifo institute in Munich. He said the ECB should have cut the amount of the purchases. "Keeping going with the purchases only because the increase in inflation is perhaps temporary is not convincing," Fuest wrote in an email. "The ECB can react if it really turns out that the inflation rate in 2018 turns out to be lower again."

The course of the ECB, the main monetary authority for the eurozone, contrasts sharply to that of the U.S. Federal Reserve. The Fed has raised interest rates twice and Fed Chair Janet Yellen said Wednesday that the U.S. central bank might hike rates "a few times a year" until 2019.

The U.S. recovery following the Great Recession is more advanced, with unemployment of 4.7 percent compared with 9.8 percent in the eurozone. The currency union saw moderate economic growth of 0.3 percent in the third quarter over the quarter before.

The ECB's stimulus includes a benchmark interest rate of zero on money it loans to banks. It also has imposed an extraordinary negative interest rate of minus 0.4 percent on deposits it takes from commercial banks, a step aimed at pushing them to lend, not hoard, their cash.

The central bank has buying 80 billion euros ($86 billion) a month in government and corporate bonds from banks using newly printed money, a step which floods the financial system with fresh cash. From April, the ECB will buy a reduced amount of 60 billion euros a month until the end of the year. Even after that, it's expected that the monetary infusions will be only gradually reduced.

The aim is for all that cheap credit and new money to find its way to businesses in the form of cheaper loans to support investments and hiring.