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ECB Chief Draghi Under Pressure

ECB Chief Draghi Under PressureECB Chief Draghi Under Pressure

Not for the first time, European Central Bank President Mario Draghi is facing a tricky balancing act. With the eurozone economic recovery well into its fifth year, the time has come to cut stimulus. Yet, overly ambitious tightening could choke off the very growth Draghi has fostered, threatening to undo years of work.

Draghi also has to find common ground between policy hawks, who argue the ECB has spent its firepower so any further stimulus has negligible effect, and doves, who point to persistently weak inflation as evidence the bank has not met its price-stability mandate, Reuters reported.

The compromise is likely to be a cut in bond purchases at the next meeting, twinned with a lengthy extension of stimulus and a commitment to keep rates low for many years to come.

Such a move would ensure that easy policy persists while also reducing the ECB's reliance on unconventional tools and potentially paving the way to exit bond purchases.

The problem is that while growth is on its best run in a decade, unemployment remains high, wage growth is barely visible and inflation will probably not rise back to the ECB's target before the end of the decade.

The bond purchases have depressed borrowing costs but the ECB is slowly running out of debt to buy so it either takes a step towards the exit or redraws the rules of the program, a potentially controversial move that may send the wrong signal.

A Reuters poll of economists concluded the ECB Central Bank will start trimming its monthly asset purchases to €40 billion ($47.27 billion) from €60 billion in January.

 

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