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ECB President Mario Draghi addresses European Parliament lawmakers on February 26.
ECB President Mario Draghi addresses European Parliament lawmakers on February 26.

Eurozone Needs Stimulus

Slack in the eurozone economy may be larger than estimated and could slow the rise of inflation

Eurozone Needs Stimulus

Mario Draghi largely skirted the Latvia crisis affecting the European Central Bank and stuck to his plans to keep adding stimulus as he addressed European Parliament lawmakers on Monday.
The ECB president said he’s not yet ready to pare back support for the eurozone despite increasing confidence that inflation will pick up. Economic slack may be bigger than thought, and policy makers must remain persistent in providing monetary accommodation, he said, adding that they must also recognize that support comes from the full suite of measures and not just bond purchases, Bloomberg reported.
“In the presence of an economic situation that is improving constantly, we need the right blend” of measures, he said in Brussels on Monday. “Uncertainties continue to prevail.”
His comments referred to the ECB’s asset purchase program, which began three years ago, and which has seen the central bank spend €2.55 trillion ($3.14 trillion) to buy government bonds and other financial assets.
Draghi’s comments come a little more than a week before the governing council meets in Frankfurt, with some officials pushing for a change in their policy language to take the central bank closer to ending bond-buying. The economy’s strength has spurred calls for an end to the ECB’s pledge that the program could be extended or expanded after September.
Speaking in New York on Friday, executive board member Benoit Coeure said the ECB can afford to slow its bond purchases, as long as it gives clear guidance over the path of interest rates. Officials currently plan to keep borrowing costs unchanged “well past” the end of their net asset purchases.

  Currency Concern
Draghi singled out the recent volatility in financial markets, including in the exchange rate, which he said deserves close monitoring with regard to its possible implications for price stability.
His appearance in Brussels was curtailed after a delayed start. One topic he tried to keep at a distance was the crisis engulfing Latvia. The nation’s third-biggest lender, ABLV Bank, is being shuttered amid money-laundering accusations, and its central bank governor Ilmars Rimsevics is facing government pressure to quit after being detained and released on bail by anti-graft authorities.
Draghi did address a question on why ABLV Bank received emergency support from the Latvian central bank before the ECB declared it failing or likely to fail. He said that the Emergency Liquidity Assistance policy—under which national central banks rather than the ECB decide to provide support to troubled lenders—is a “remnant of a past time” and should be reformed.
Asked why the ECB didn’t block the injection of ELA to ABLV just hours before it was declared as failing or likely to fail, Draghi said that the Frankfurt-based central bank can only object to such injections when they interfere with monetary policy objectives.
“The ELA rules should be changed,” he told lawmakers, omitting any defense of the decision made by Latvian authorities. “I personally have argued several times toward a centralization of ELA.”
On the euroland economy, Draghi said further declines in unemployment and a pickup in wage growth should boost consumer-price growth, but that there is still a way to go. While the euroland economy is enjoying its fastest expansion in a decade, data this week will likely show inflation continues to undershoot the ECB’s target of just below 2%.

  Adjustment Speed
“The relationship between growth and inflation remains largely intact, even if it has temporarily weakened in recent years to the extent that the speed of adjustment in inflation towards our aim has been affected,” he said.
Slack in the eurozone economy may be larger than estimated and could slow the rise of inflation, he said.
He lauded the impact of ECB’s extraordinary policies, saying stimulus measures will add around 1.9 percentage points cumulatively to growth and inflation for the period between 2016 and 2020.
Draghi’s appearance in parliament was followed by a public hearing for Spanish Economy Minister Luis de Guindos, who finance ministers have nominated as the next ECB vice president from June 1. Guindos backed the central bank’s monetary policy, saying it hasn’t been a “laggard” compared with the US Federal Reserve as the two economies are in different phases of the business cycle.
He also said he “totally supports” Draghi’s comments on ELA, calling for a “common framework” to deliver support to banks that are solvent but in difficulty.

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