Eurozone inflation remained lower than expected in December, official data said on Tuesday, adding pressure on the European Central Bank to once again ramp up its efforts to boost the economy in Europe. ECB president Mario Draghi disappointed markets last month with a limited bid to revive the struggling eurozone given near-zero inflation levels across the 19 countries that share the euro..
Srimoyee Pandit writes: The ECB has pledged to do all it can to pull inflation up “as quickly as possible”. The central bank on December 3rd decided to slash deposit rate by 10 basis points.
The ECB also extended its quantitative easing program (QE) to March 2017. The central bank not only decided to include euro-denominated regional and local debt in its QE program but said it will reinvest the principal payments on the securities purchased to support liquidity conditions. Draghi has noted “our asset purchase program is flexible. It can always be adjusted. We decided the extension of our horizon and especially the re-investment of principal would be sufficient”.
The ECB Chief Mario Draghi, in an effort to assure markets that the central bank would do all that it takes to push up price pressures in the euro zone, stated on 14th December that there was no limit to the tools that it can opt for to raise inflation to target. He reassured that inflation target would be reached “without undue delay”. “After the recalculation of our tools carried out by the Governing Council earlier this month, we expect inflation to reach our target without undue delay,” Draghi said. He also said that the use of instruments can also be intensified further to achieve price stability in the bloc. With inflation hovering just above zero, the ECB is aware that further delays in achieving its inflation target of just below 2 per cent could damage its credibility.
The risks to the world economy and to the inflation outlook remain skewed to the downside. GDP is expected to grow 1.5 per cent in 2015, 1.6 per cent and 1.7 per cent in 2017. Economic activity will likely continue to be supported by sustained monetary stimulus, neutral fiscal stance and lower oil prices. However, high private indebtedness will remain a drag on consumption and investment in many countries of the bloc.
The ECB expects inflation to come in at 1 per cent in 2016. Inflation forecast has been estimated at 1.6 per cent for 2017 as against 1.7 per cent estimated earlier. The central bank believes low oil price will support household disposable income thereby supporting private consumption.
The labour force is expected to expand only moderately in the next fiscal hindered by impact of still high unemployment in some countries of the bloc and adverse demographics in others. The unemployment rate edged down to 11.1%
Draghi is aware that lower interest rates, though can ensure price stability, cannot guarantee lasting prosperity. He thus stressed on the need for “structural recovery” to lift potential growth in the euro zone. Draghi has called for increase in investment. He feels weak demand dynamics, the still-high private debt overhang and fragile private sector confidence have weighed on investment in the bloc. He has also urged countries to facilitate a “work-out” of toxic loans to facilitate recovery in credit and lending.
If and only when relevant fiscal policies go hand in hand with expansionary monetary policy the bloc will attain the much needed boost to overcome disinflation and grow. Absolute reliance on monetary policy will not be able to help recovery. On the contrary, it will sow the seeds for the next financial crisis.