In World Economy News 05/02/2016
Mario Draghi said the fact that inflation is weak globally won’t stop the European Central Bank from adding stimulus for the euro area if needed.
“There are forces in the global economy today that are conspiring to hold inflation down,” the ECB president said in a speech in Frankfurt on Thursday. “What matters is that central banks act within their mandates to fulfill their mandates. In the euro area, that might create different challenges than it does in other jurisdictions, but those challenges can be mitigated. They do not justify inaction.”
Central banks the world over are deliberating how to handle slowing global trade and a slump in oil prices that’s damping inflation. The Bank of England sets policy on Thursday and publishes its Inflation Report, with investors predicting no increases in borrowing costs for almost two years, while the U.S. Federal Reserve has signaled it may put off a March rate hike and the Bank of Japan has introduced negative rates.
The ECB is currently reviewing its monetary stance and policy makers will decide on March 10 whether the current program of negative interest rates and a 1.5 trillion-euro ($1.6 trillion) bond-buying plan goes far enough. Euro-area consumer prices rose an annual 0.4 percent in January and the rate is likely to turn negative in coming months.
No Surrender
While euro-area unemployment decreased to a four-year low in December, the region’s manufacturing and services industries cut prices at the fastest pace in almost a year in January, underlining concerns that weak inflation is becoming ingrained in the economy.
“If we do not ‘surrender’ to low inflation — and we certainly do not — in the steady state, it will return to levels consistent with our objective,” Draghi said at the event hosted by Germany’s Bundesbank. “If on the other hand we capitulate to ‘inexorable disinflationary forces’ or invoke long periods of transition for inflation to come down, we will in fact only perpetuate disinflation.”
Officials including Bundesbank President Jens Weidmann — who also attended the conference — have argued that central bankers should look through short-term factors such as the plunge in oil prices. Draghi argued that while falling energy costs are a consequence of a glut of crude, the longer inflation stays low, the greater the risk that feeble inflation expectations become embedded and undermine the economy.
“Even what began as a positive supply shock can turn into a negative demand shock,” Draghi said. “In a context of prolonged low inflation, monetary policy cannot be relaxed about a succession of supply shocks.”
Mandate First
The ECB president also countered other arguments against aggressive central-bank action, including financial-stability risks, which he said seem limited, and the unique structure of the euro area. He noted that the currency bloc has a segmented banking and capital market and lacks a single fiscal authority, and said measures can be tailored to deal with that.
“There can be no doubt that if we needed to adopt a more expansionary policy, the risk of side effects would not stand in our way,” Draghi said. “We always aim to limit the distortions caused by our policy, but what comes first is the price-stability objective.”
