ECB steadily continues monetary easing policy as EU economy gains momentum

Mario Draghi

European Central Bank – Press Conference Vítor Constâncio, Vice-President of the ECB, Mario Draghi President of ECB and Christine Graeff, Director General Communications (from left to right). Location: Frankfurt . Date: 09/03/2017 © ECB, 2017 / Source: ECB – Audiovisual Service

It was last Thursday when the president of the European Central Bank gave a speech on ECB’s monetary policy and EU economic recovery at the ECB and Its Watchers XVIII Conference in Frankfurt. Mario Draghi’s opinion is that the ECB’s policy is working and monetary easing should be continued as inflation rates highly depend on it.

However, the Germans couldn’t let this unanswered with Jens Weidmann, president of Bundesbank, to support for a less stimulus policy given the fact that economy is improving.

Inflation target still not reached

The ECB is continuing its monetary policy, at least till the end of the year, since inflation rate has not yet stabilized to the central bank’s target of below but close to 2%. Thus far, inflation reached a remarkable 2% on February, the highest annual rate since January 2013, but slowed down to 1.5% last month. Those figures could be encouraging for ECB if there were not plasmatic as are driven mainly by food and energy price inflation with core inflation to be at 0.9%.

More specifically, Mario Draghi stated during the conference on the issue:  “We are not yet at a stage when inflation dynamics can be self-sustaining without monetary policy support. The recovery of inflation still depends on the very favourable financing conditions that firms and households enjoy, which in turn depends on the substantial degree of monetary policy accommodation we have in place today.”

Germany responds

The stance of Germany has been always opposite to the ECB’s loose monetary policy. This time, the president of the German central bank mentioned at a banking conference in Berlin that the ECB should be implementing a less stimulus policy as it is more harmful for the EU economy. Besides, it is known that Germany does not favor negative interest rates and expansionary monetary programmes as it is the largest saver of the Eurozone.

Is the EU economy recovering?

Mario Draghi stated that the EU economy has been recovering but there are still uncertainties which can have negative consequences to the bloc. Furthermore, the ECB‘s president believes this monetary policy is one of the key factors which support the economic recovery. More in detail, Mario Draghi said last week: “We are confident that our policy is working and that the outlook for the economy is gradually improving. There are indeed three features of the recovery which give us confidence that it may be gaining its own momentum, although – given the severity of the slump we are emerging from – monetary policy still remains critical to facilitate the transition”.

The European Commission released the Winter Economic Forecast 2017 report on February. The EU economy is expected to grow at a pace of 1.8% in 2017 and in 2018. Moreover, the unemployment rate in the region is forecasted to fall from 8.5% in 2016 to 8.1% this year and to 7.8% in 2018. Even if these are the lowest unemployment figures since 2009, they remain above pre-crisis levels according to the report. In general, the Commission predicts that all EU countries will expand economically during 2016 and 2018.

EU faces great challenges

However, the EU risks from high political and economic uncertainties starting from the general elections taking place in France and Germany this year to Brexit and migration crisis. All the above are about to have a direct impact on the EU economy together with the fact that the reduction of unemployment rates is not adequately increasing wages and prices. Therefore, ECB should not only target on how to reach the desirable inflation rate but also make sure that it is not at the entire cost of the EU economic growth.

All in all, the economic figures reveal that ECB‘s intervention via stimulus monetary policy is still needed to make sure that the EU keeps on recovering. It is imperative that the EU economy becomes more resilient to economic shocks in order to ensure that future financial crises are avoided.

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