European Central Bank: Global politics now the bigger risk

Risk factors Draghi mentioned include the raft of European elections this year in France, the Netherlands and Germany that will give right-wing candidates opposed to the EU and euro membership a chance to test their support. And Britain is due to start its official divorce talks with the European Union within weeks.

New U.S. President Donald Trump has raised uncertainty about U.S. policy on trade as well as toward the dollar by at one point mentioning the currency was “too strong.” One of his trade advisers accused Germany of benefiting from a too-weak euro. Draghi rejected such criticism, citing the U.S. Treasury’s own assessment that the ECB has not intervened in currency markets.

He said it was especially important for countries to avoid protectionism and stick with commitments not to devalue their currencies to grab a quick trade advantage at others’ expense. Finance ministers from the Group of 20 biggest economies, including new U.S. Treasury Secretary Steven Mnuchin, are to get a chance to do that at a meeting in Baden-Baden, Germany, next week.

Draghi said that while geopolitical events have not derailed the economy’s recovery so far, it was unwise to become complacent.

“We don’t know yet how these risk events will reverberate on the economic situation,” he said.

Draghi was speaking after the ECB decided against changing the size or duration of its stimulus programs, even though economic growth across eurozone appears to be picking up steam and inflation has risen to the bank’s targets.

Draghi pointed out that the recent rise in the annual inflation rate to 2 per cent — past the ECB’s target of just below 2 per cent — has come from higher oil prices, and not from fundamental improvements in the economy such as higher wages for workers.

He said underlying inflation across the region is still too weak for the bank to start the process of withdrawing its monetary stimulus efforts.

Core inflation, which strips out the volatile items of food, energy, alcohol and tobacco, has been stubbornly low over recent months at an annual rate of 0.9 per cent.

In light of the near-doubling in headline inflation rate to 2 per cent in the past few months, the ECB, which is the chief monetary authority for the 19 countries that use the euro, sharply raised its inflation projection for this year, to 1.7 per cent from 1.3 per cent previously.

The inflation estimates for 2018 was nudged up to 1.6 per cent from 1.5 per cent while the forecast for 2019 was left at 1.7 per cent.

Draghi credited the bank’s stimulus for the improvement in the economy and said that data suggest growth will continue “to firm and broaden.”

The eurozone economy grew 1.7 per cent last year as the bloc continues to recover from a crisis over high debt that threatened to break it apart in 2011-2012. Unemployment has slowly fallen to 9.6 per cent with big differences among member countries; Germany’s is at 3.9 per cent but Greece, still struggling with bailouts, has a rate of 23 per cent. By comparison, the rate in the U.S. is 4.8 per cent.

The ECB kept its bond purchases from banks — a form of stimulus — unchanged at 80 billion euros ($85 billion) this month and 60 billion euros per month through the end of the year. It held its key short-term interest rate benchmark at zero, and maintained its rate on deposits from commercial banks at minus 0.4 per cent. That is in effect a tax aimed at pushing banks to lend the money, not stash it at the ECB.

Now that inflation has reached 2 per cent, calls have arisen to start withdrawing the stimulus, particularly in Germany, where the stimulus was never popular in the first place. German economists, media and politicians have bemoaned low interest rates on savings and pension products. Some have argued that the low rates bail out indebted governments such as Italy, which face less pressure to reduce budget deficits because they can borrow cheaply.

Draghi has pushed back against critics so far with the backing of an apparent majority on the bank’s 25-member governing council. Nineteen of the members are the heads of central banks from the member countries — several of which need the stimulus far more than Germany.

The bank made some tweaks to its policy statement, dropping wording that said it “stood ready” to use its powers to apply more stimulus.

“The ECB thus signals that, while the risk that it may have to loosen policy further has diminished, it has not moved significantly closer to actually tightening policy,” said analyst Holger Schmieding at Berenberg Bank.

David McHugh, The Associated Press

by Canadian Press

European Central Bank: Global politics now the bigger risk

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