ECB welcomes recovery signs, but money stays loose

The European Central Bank reported signs of an improving eurozone economy Thursday, but said it would keep cheap money gushing for fear of undermining the recovery.

ECB watchers were alert for any tightening of the ECB's ultra-loose policy as inflation rates rise and prospects for growth in the 19-nation single currency area improve.

The central bank has set interest rates at record lows and buys tens of billions of euros of bonds per month in a bid to drive up growth and inflation.

At the meeting of the bank's governing council "there was a general recognition that the balance of risk has improved, certainly as far as growth is concerned," ECB president Mario Draghi told reporters. "There is no longer that sense of urgency in taking further actions."

But "this is a gradual process," he went on at a Frankfurt press conference.

"The governing council members want to be convinced they see a self-sustained adjustment in the inflation rate" before closing the money sluices, he said.

For now, faced with uncertain impacts from global upheavals abroad and elections at home, the ECB plans to continue its bond-buying scheme until December as planned, as well as maintaining its commitment to interest rates "at present or lower levels" for the foreseeable future.

"Spring is coming and the ECB is celebrating," judged analyst Florian Hense of Berenberg bank, while noting that, despite the lifting spirits, "it has not moved significantly closer to actually tightening policy".

- Grounds for optimism -

The central bank now expects growth of 1.8 percent in 2017 and 1.7 percent in 2018, compared with earlier forecasts of 1.7 percent and 1.6 percent, respectively, Draghi said.

Meanwhile, inflation should reach 1.7 percent in 2017 and 1.6 percent in 2018 -- up from previous predictions of 1.3 percent and 1.5 percent.

The ECB left unchanged its forecast of 1.6 percent GDP growth and inflation for 2019.

But Draghi argued that the strong forecasts for growth and headline inflation masked ongoing weakness in core, or underlying inflation, which excludes volatile elements like energy and food.

In particular, he said, the 19 central bank chiefs and six directors who make up the governing council will be looking for growth in wages as evidence that the gears of recovery are meshing together.

Higher salaries are "the linchpin of a self-sustained increase in inflation, that is the key variable," Draghi said.

"The euro area economy remains weak and unemployment rates are too high to allow for a quick return to price stability and for an end to the expansive monetary policy," said Marcel Fratzscher, head of Germany's DIW economic think-tank.

"Political uncertainty is the biggest threat to the euro area economy and to the ECB's monetary policy."

- Uncertain path ahead -

Elections in key eurozone member states France, the Netherlands and Germany coming up this year have all clouded the outlook for the ECB, with parties sceptical of the single currency lined up to make gains.

But Draghi allowed himself a touch of optimism in responding to journalists' questions about looming political risks.

Surveys showed a large majority of people in euro area countries support the currency, he noted.

What's more, "we haven't yet seen a significant economic impact" from political upheavals over the past year, Draghi said, including Britain's vote last June to quit the EU and the US election of President Donald Trump.

"Some of these events will produce in the medium term negative consequences," he allowed, but "we don't yet know how these risky events will reverberate."

A G20 ministerial gathering in Germany next week will see Draghi confronted for the first time with a member of the new US administration, Treasury Secretary Steve Mnuchin.

Trump, elected on an "America first" platform of "economic nationalism", may be unwilling to reiterate commitments by the regular gathering of industrialised and emerging nations against protectionism and competitive currency manipulations.

The Republican president and his advisors have repeatedly attacked the euro as being "undervalued", charging that this allows Germany to rack up huge trade surpluses with competitively-priced exports.

Draghi refused to be drawn on the prospects of convincing Washington otherwise, saying only that he was "confident the discussion will be fruitful".

source: AFP