ECB enters 2017 in battle to hold steady course

  • ultra-loose monetary policy
- Agence France-Presse, FRANKFURT

Jan 20, 2017-

The European Central Bank will not deviate from its ultra-loose monetary policy at its first 2017 meeting Thursday, 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 ($85 to $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 percent.

Since the Governing Council’s last meeting, when the most recent figures for November showed average inflation of 0.6 percent across the eurozone, the picture has shifted. Figures for December showed inflation in the single currency area stood at 1.1 percent on average and at 1.7 percent 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. High average inflation also conceals sharp disparities across the eurozone, with the indicator still anaemic in Greece and Italy.

“It is absolutely premature today to claim victory over a weak economy,” ECB board member Yves Mersch—one of the more hawkish voices at the top of the bank—said earlier this month. Policymakers have made clear that as well as headline inflation, they keep a close eye on the core figure, which excludes more volatile food, alcohol, tobacco, and energy prices.

“The ECB will highly likely point to the fact that core eurozone inflation only edged up to 0.9 percent in December from 0.8 in November,” commented analyst Howard Archer of IHS Markit. “There will be no dilution of the ECB’s policy any time soon” against that background, Archer said. That may be little comfort for inflation outlier Germany, where Chancellor Angela Merkel’s centre-right alliance faces an insurgent challenge from eurosceptics in September elections.

Finance minister Wolfgang Schaeuble used a newspaper interview last week to press the ECB to wind down its stimulus efforts. “It would probably be right if the ECB starts daring to head for the exit this year,” he said.

Analysts said such calls were likely to grow if the euro area saw a consistent run of strong data. For now, “we expect Draghi to emphasise that uncertainty remains elevated and the medium-term outlook has not changed much,” said Marco Valli of Unicredit.

He will argue that “recent developments vindicate the policy decisions taken on December 8” and brush aside calls to end monetary easing sooner, Valli continued.

Published: 20-01-2017 09:51

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