From Reuters: Telling critics to be patient, ECB sticks to ultra-easy policy

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The European Central Bank stuck to its super-easy monetary policy on Thursday, telling those calling for a tightening – like economic powerhouse Germany – to be patient as the bloc slowly regains its economic health.

Pledging to look through an inflation blip fueled by rising oil prices, ECB President Mario Draghi acknowledged a string of surprisingly strong growth indicators. But he argued that the outlook was still fraught with risk, requiring the bank to maintain its unprecedented stimulus.

Having already bought 1.5 trillion euros ($1.6 trillion)worth of assets and cut rates deep into negative territory, the bank often tests the patience of hawkish Berlin, and tensions could run high this year as Germany prepares for elections in the autumn.

“The recovery of all of the euro zone is in the interests of everybody, including Germany,” Draghi said. “We have to be patient. As (the) recovery will firm up, real rates will go up.”

Critics in Berlin argue that thrifty Germans face negative returns on their savings while highly indebted and inefficient governments borrow money for next to nothing, raising concern that German voters will turn on the establishment and flock to populist parties.

With elections also due in France, the Netherlands and possibly Italy, the ECB will be keen to chart a steady course and avoid any more political ripples until new governments are in place.

“For the time being, the ECB will stay on its autopilot,” ING economist Carsten Brzeski said. “Even a hint at 2018 tapering will not come before the summer, after the Dutch and French elections and the first possible impact of new U.S. economic policies.”

The bank last month agreed to cut its asset buys by a quarter from April, but it extended the 2.3 trillion euro scheme, known as quantitative easing, until the end of the year, a comprehensive move many rate setters hope will be enough to get them through most of this year without further action.

OIL SPIKE

Draghi’s next task will be to sit through the coming inflation spike as higher energy costs push inflation close to the ECB’s 2 percent target, a big change after years of fighting off deflation.

Convinced that the surge is temporary and calling the specter of rapid growth and inflation a high-class problem, Draghi dismissed calls for policy action before he saw signs of a more permanent adjustment.

“There are no signs yet of a convincing upward trend in underlying inflation,” Draghi said. “Measures of underlying inflation are expected to rise more gradually over the medium term.

The euro fell to the day’s low at just below $1.06 on Draghi’s dovish tone on expectations that the ECB will stay put for months to come even as the U.S. Federal Reserve moves ahead with rate hikes, widening the rate differential between the world’s two biggest central banks.

“The ECB may need to start discussing tapering later this year, if only to put a little market pressure on governments that have been dragging their heels on reform,” HSBC said. “But for now, Mr Draghi seems determined to keep monetary policy on its pre-set course.”

The problem is that the euro zone’s recovery still relies heavily on ECB stimulus as governments either lack the tools or the resolve to reform inefficient and highly indebted economies.
That said, inflation hit a three year high last month, manufacturing activity is accelerating and confidence indicators are firming, all pointing to solid growth at the end of last year.

Indeed, euro zone business growth was the fastest in more than five years in December, order books are surging on export demand, and consumption is holding up, despite rising energy costs, all pointing to the sort of resilience not seen since before the bloc’s debt crisis.

But the underlying picture is mixed.

Inflation is still just half of the bank’s 2 percent target and higher oil prices will likely dampen consumer demand, a potential long-term drag on growth.

The market euphoria after Donald Trump’s U.S. election win is also yet to be backed up by concrete policy action, and the threat of more protectionist policies from the United States and possibly Britain could reverse market sentiment.
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