ECB meets under pressure as inflation tops target

The European Central Bank (ECB) governors will likely resist calls to end a flood of cheap money when they meet Thursday, analysts said, despite euro zone inflation topping their near 2 percent target.
Inflation in the 19-nation single currency area stood at 2 percent in February, Eurostat figures showed last week, the first time since 2013 it has outstripped the ECB’s mandate of “close to, but below 2 percent.”
Even before then, critics were urging the Frankfurt institution to wind down its massive monetary easing measures that include buying tens of billions of euros of government and corporate bonds each month, cheap loans to banks, and historically low interest rates.
But ECB policymakers have argued that the sudden jump in euro zone price growth since December is a temporary effect of increased energy prices.
“We should not react to individual data points and short-lived increases in inflation,” ECB President Mario Draghi told European Parliament (EP) lawmakers in February. “Support from our monetary policy measures is still needed.”
Analysts largely agree with ECB executive board members that beyond volatile items such as food and energy, underlying pressure on prices from more durable sources, like increased wages for workers, remains too weak to justify tweaking the stimulus package.
“Core inflation has remained low despite the rise in the headline rate,” Jennifer McKeown of Capital Economics said.
“Even in Germany, where the labor market has been strong for some time, there are few signs of pay pressures.”
According to Eurostat, unemployment across the euro zone stood at 9.6 percent in February — steady at the lowest rate since May 2009, but still leaving slack in the market to hold back wage increases, usually a key driver of inflation.
The ECB has been loath to exit its monetary stimulus program too quickly, afraid of nipping a still-fragile economic recovery in the bud.
On Thursday, policymakers “will not want to add any new uncertainty on the eve of two important elections in the euro zone” — the Netherlands later this month and France between April and June — ING Diba bank economist Carsten Brzeski predicted.
But governing council members have begun debating in public speeches what the beginning of the end of stimulus could look like.
The bank’s “forward guidance,” carefully crafted statements about future policy, has long suggested interest rates will “remain at present or lower levels for an extended period of time” — and certainly until after the bond-buying program is wound down.
Higher interest rates are needed to manage a faster-growing economy with higher inflation.
So a change to that language suggesting higher rates could be on the way would be an early indicator that the ECB sees the economic recovery on a firmer footing and is looking to cut back its stimulus programs, Brzeski said.
Board member Yves Mersch called for just such a change in early February — but has yet to be echoed by advocates of a more supportive policy like Draghi.
Rather than moving this week, policymakers “would wait until after the French elections until they give any direct or big hint at tapering,” or gradually winding down bond-buying, Brzeski suggested.
With little new economic data to go on since the governing council’s last meeting in January, few observers expect the ECB to make drastic changes this week.

Source: Arab News