ECB won’t act on temporary inflation spikes

The European Central Bank (ECB) will not tighten policy to counter surging inflation as the rise is temporary and due almost entirely to rising oil prices, ECB President Mario Draghi said on Monday, brushing aside calls for the ECB to reduce stimulus.
The currency bloc’s recovery is gaining strength but labor market slack remains large, productivity growth is weak and risks remain tilted to the downside, requiring the ECB’s continued help, Draghi told the European Parliament’s committee on economic affairs.
With inflation surging to the ECB’s target last month, calls, particularly from Berlin, have increased for the bank to claw back stimulus and start phasing out its €2.3 trillion ($2.4 trillion) asset-buying program, which has kept borrowing costs at record lows for years.
Echoing the message of Peter Praet, his chief economist, Draghi said the ECB would not react to short-term and temporary swings in data, suggesting that any tapering, or winding down the asset buys is far into the future.
“Support from our monetary policy measures is still needed if inflation rates are to converge toward our objective with sufficient confidence and in a sustained manner,” Draghi said.
“Our monetary policy strategy prescribes that we should not react to individual data points and short-lived increases in inflation,” Draghi said. “We therefore continue to look through changes in (harmonized) inflation if we believe they do not durably affect the medium-term outlook for price stability.”
The ECB’s asset buys will be reduced by a quarter from April but are set to continue at least until the end of the year.
Euro zone inflation hit 1.8 percent in January and is likely to exceed the ECB’s target of almost 2 percent in the coming months, firming resistance in Germany, the euro zone’s biggest economy, to the ECB’s policy of easy cash.
But core inflation, which excludes energy and food prices, is still low and Draghi pointed to weak underlying trends as a key reason for continued monetary support.
“So far underlying inflation pressures remain very subdued and are expected to pick up only gradually as we go on,” he said. “This lack of momentum in underlying inflation reflects largely weak domestic cost pressures.”

Source: Arab News