Wed | Aug 23, 2017

ECB chief Draghi cautiously upbeat on Eurozone

Published:Friday | May 12, 2017 | 5:00 AM
President of European Central Bank, Mario Draghi.

The head of the European Central Bank (ECB) says that risks to the strengthening economy of the 19-country Eurozone have fallen - but insists it's too early to declare victory and start withdrawing stimulus measures.

Mario Draghi said in remarks delivered Wednesday in the Dutch parliament that recent data confirm that the rebound "is becoming increasingly solid and that downside risks have further diminished".

He added that "nevertheless, it is too early to declare success" and stressed that the bank's improved forecasts assume the full implementation of its stimulus measures. The bank says it will continue pumping €60 billion (US$66 billion) a month in newly printed money into the economy through to the end of the year, and beyond if necessary. The bank has also held its key interest rate benchmark at a record low of zero even as growth picked up.

Draghi was greeted by finance committee chairman Pieter Duisenberg, the son of Wim Duisenberg, the first head of the ECB when it was created in 1998 ahead of the introduction of the shared euro currency in 1999. Wim Duisenberg died in 2005.

The committee, however, gave Draghi anything but a nostalgic reception. The ECB's stimulus programmes have provoked criticism in the more prosperous northern European countries such as Germany and the Netherlands. That's because the stimulus efforts to lower market interest rates are seen as hurting savers and bailing out less financially solid countries.

Lawmaker Tony van Dijck told Draghi that "you're not a hero" in the Netherlands by depriving savers of returns on their holdings.

Draghi responded that the stimulus had benefited the economy and ordinary people by helping boost employment. He said the policies had played a role in the creation of 4.5 million jobs over the last three years.

Analysts expect the ECB to signal later this year it will taper the stimulus programme in 2018.

The currency union's economy grew 0.5 per cent in the first quarter and unemployment has fallen slowly to 9.5 per cent, but with sharp differences between countries. Inflation, meanwhile, has risen to 1.9 per cent, in line with the ECB's goal of just under two per cent. But the bank has warned it needs to see that inflation is back on track in a sustainable way. Core inflation, which excludes volatile food and fuel prices, remains at a weak 1.2 per cent.

Withdrawing the stimulus will have far-reaching effects. It will mean higher interest costs for longer-term borrowers such as corporations, governments and people with house mortgages. It will make it easier to save for retirement and to fund pension plans out of current income. It could also send bond prices lower in the short terms. Over the longer term, higher rates should make conservative holdings such as savings accounts and bonds more attractive relative to riskier ones such as stocks.

- AP