World Economy

Higher Inflation Needed to End EU Stimulus

ECB President Mario Draghi says monetary policy needs to be patient, persistent and prudent
ECB President Mario Draghi (L) speaks to Managing Director of ESM Klaus Regling during a meeting of the eurogroup at the EU Council building  in Brussels on Monday. ECB President Mario Draghi (L) speaks to Managing Director of ESM Klaus Regling during a meeting of the eurogroup at the EU Council building  in Brussels on Monday.

European Central Bank head Mario Draghi says the expanding eurozone economy still faces "risks and uncertainties"—including a looming trade dispute with the United States—and has cautioned that inflation needs to rise further before monetary stimulus is ended.

Speaking at a conference at Frankfurt's Goethe University, Wednesday, Draghi said that higher inflation, not growth, is the "very clear condition" for the central bank to end its bond-buying stimulus program, and that risks to the outlook remain. Inflation of 1.2% annually is short of the bank's goal of just under 2% considered best for the economy, AP reported.

Inflation could stay low if slack in the economy and the labor market takes longer to shrink than usual in economic recoveries. Meanwhile a protracted trade conflict could hurt growth and inflation as well.

US President Donald Trump has announced new import taxes of 25% on steel and 10% on aluminum.

Draghi said that tariffs' "first round effects are likely to be small". But he warned that, after that, the "second round effects could have much more serious consequences" if the European Union retaliates and the dispute spreads trade restrictions to other categories of goods. That escalation could in turn hit business confidence and investment.

The European Central Bank, the top monetary authority for the 19 countries that use the euro as currency, has said its €30 billion ($37 billion) in monthly purchases will continue at least through September, but has given no fixed end date. Annual growth has strengthened to 2.7% in the fourth quarter.

Draghi echoed earlier cautious comments by saying that monetary policy needs to be "patient, persistent and prudent." He said that the central bank would stick to its guidance on the sequencing of the next steps, meaning that the first interest rate increases will only start well after the end of the bond purchases. That would put them off until at least 2019. Currently the bank's benchmark short-term rate is at a record low zero.

The European Stability Mechanism head Klaus Regling said the ESM could play a role in debt restructuring in future, adding that he was, however, sceptical about automatically extending debt maturities.

Get Ready for the End

The end of the European Central Bank’s expansionary monetary policies is nearing and banks should prepare for the risks that the new phase will bring, a top ECB supervisor said on Wednesday, Reuters said.

Ignazio Angeloni told a conference in Rome that the Italian banking sector was under “special scrutiny” after the collapse of numerous lenders in the last few years as the sector battles to reduce its huge stock of bad loans.

Angeloni, who represents the ECB on the EU’s bank supervision board, said plans put together by the ECB and the European Commission will together help Europe to improve the balance sheets of its banks, but warned of risks ahead.

The end of the ECB’s asset-buying program known as “quantitative easing” is a “natural evolution which everyone should be prepared for,” he said.

He added that protectionist trade policies announced by the United States also carry risks for the global economy, and Europe is particularly vulnerable to them.

Jan Industrial Output Weaker

Eurozone industrial production was weaker than expected in January, mainly due to a sharp drop in the output of energy, data from the European Union’s statistics office showed on Wednesday.

Production in the 19 countries sharing the euro fell 1% month-on-month in January for a 2.7% year-on-year rise. Economists polled by Reuters had expected only 0.4% monthly decline and a 4.7% year-on-year increase. Eurostat also revised upwards year-on-year data for December to 5.3% growth from the previously reported 5.2%.

Energy had the biggest downward pull on the aggregate number because its production fell 6.6% on the month and 10.4% from a year earlier.

Stocks Flip

European stocks latched onto small gains Wednesday, buoyed after Draghi said its bond-buying program will likely continue if underlying inflation in the region remains subdued, MarketWatch reported.

The Stoxx Europe 600 index rose 0.1% to 375.83, led by gains for consumer goods and telecom stocks. But tech stocks lost the most. On Tuesday, the index dropped 1%, largely as the euro and the pound surged against the US dollar.

France’s CAC 40 index turned up by 0.1% to 5,249.16. Germany’s DAX 30 rose 0.3% to 12,254.03. The UK’s FTSE 100 index rose 0.3% to 7,1621.44, but Spain’s IBEX 35 fell 0.3% to 9,658.40.

The euro bought $1.237, down from $1.239 late Tuesday in New York.

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