World Economy

ECB Stimulus Needs Time to Boost Inflation

ECB Stimulus Needs Time to Boost InflationECB Stimulus Needs Time to Boost Inflation

Federal Reserve and European Central Bank officials called for time to give their policies some breathing space, though ECB Vice President Vitor Constancio said a US interest-rate rise is just the signal the world economy needs.

The European Central Bank’s latest stimulus measures need time to boost inflation in the eurozone, Constancio said in a panel discussion in London on Monday, calling on governments to do their part to stimulate growth, Reuters reported.

Constancio’s comments supported a view that the ECB was unlikely to ease monetary policy again in the near future after it cut interest rates in March, ramped up its money-printing program and unveiled a scheme where banks would be paid to borrow from it.

“We have to allow some time for the package of measures adopted in March to produce its effects, while closely monitoring external developments,” Constancio said in a speech in London.

“The ECB will continue to do what is necessary to achieve its goal of reaching a level of inflation close to 2% and enough policy tools can still be used,” he added.

But he also called on governments to provide fiscal stimulus, albeit within European budget limits, take measures to boost productivity and complete Europe’s banking and markets union, which is notably still lacking a single deposit insurance.

 Joblessness Over 10%

“Combined, this would make the eurozone fit to deliver a more prosperous future for its citizens,” Constancio said.

The eurozone has an unemployment rate of 10.2% and inflation was minus 0.2% last month.

Chicago Fed President Charles Evans said in the panel discussion that the US central bank is “just being careful” by pausing in its campaign to raise rates, and that borrowing costs should increase later in the year if economic fundamentals remain sound. Constancio said he hopes Evans is right, Bloomberg reported.

“That would be a very important proof that monetary policy can be very effective” in boosting demand and growth even when fiscal policy is lacking, he said. “That will lift animal spirits everywhere.”

The ECB sees the US economy as a source of both demand and global economic confidence as the Fed slowly tightens policy. At the same time, eurozone officials, who cut rates in March and expanded their bond-purchase program, intend to keep an ultra-loose stance to fight off the threat of deflation.

The US economy should grow at about 2.5% pace for the rest of this year and unemployment will likely fall to 4.75%, said Evans, who is not a voting member this year.

“The continuation of a wait-and-see monetary policy response is appropriate to ensure that economic growth continues, labor markets strengthen further, wages begin to increase more, and all of this supports an eventual increase in currently low inflation back up to our 2% objective,” Evans said.