International

ECB: Risks have shifted from domestic to international

President of the European Central Bank Mario Draghi poses for photographers prior to a news conference in Frankfurt, Germany, Thursday, March 9, 2017, following a meeting of the ECB governing council. (AP Photo/Michael Probst)

FRANKFURT, Germany: The European Central Bank thinks the balance of risks facing the 19-country eurozone has shifted away from its own homegrown and drawn-out economic difficulties to the international arena. In a press briefing Thursday after the bank kept policy unchanged, president Mario Draghi said domestic pressures have “been more contained” but that at the same time, geopolitical risks “are on the up.”

He noted Britain’s decision to leave the European Union last June as a risk to the eurozone even though no real economic impact could yet be seen. Political uncertainties abound in the eurozone this year, including elections in the Netherlands, France and Germany.

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

Draghi was speaking after the bank opted against any change to 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 argued the recent rise in the annual inflation rate to 2 percent – past the ECB’s target of just under 2 percent – has come from higher oil prices, and not from fundamental improvements in the economy such as higher wages for workers.

He said underlying inflationary pressures across the region are still too weak for the bank to start the process of withdrawing its monetary stimulus efforts. Underlying inflation pressures, he said, “continue to remain subdued.”

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 percent, even as the headline rate has spiked to 2 percent.

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

The inflation estimate for 2018 was nudged up a tenth of a percent to 1.6 percent from 1.5 percent while the forecast for 2019 was left unchanged at 1.7 percent.

Though Draghi sought to sound some caution over inflationary pressures, he did point to a raft of economic indicators showing that the eurozone economy has picked up momentum.

Draghi said incoming data increases confidence that the economic expansion will continue “to firm and broaden” and that the balance of risks regarding economic growth has improved.

The eurozone economy grew 1.7 percent last year as the currency union recovers from a crisis over high debt that threatened to break it apart in 2011-2012. Unemployment has slowly fallen to 9.6 percent with big differences among member countries; Germany’s is at 3.9 percent but Greece, still struggling to adjust after piling up too much debt and being bailed out by other countries, has a painfully high rate of 23.0 percent. For comparison, the U.S. has 4.8 percent unemployment and a stronger recovery.

Draghi was speaking after the bank kept its bond purchases from banks 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 percent. That is in effect a tax aimed at pushing banks to lend the money, not stash it at the ECB’s supersafe deposit facility.

Now that inflation has reached 2 percent, 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.

 
A version of this article appeared in the print edition of The Daily Star on March 10, 2017, on page 6.

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