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Too early for stimulus exit: Draghi

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Frankfurt am Main: European Central Bank chief Mario Draghi asked for patience for his policies to work as he brushed aside calls to change course following a spike in inflation.


As expected, the ECB’s 25-member governing council left its key interest rates and mass bond-buying programme unchanged in the first policy meeting of the year.


Draghi said the time would come when the bank would start scaling back its unprecedented stimulus measures. “But we are not there,” he told journalists at a press conference after the meeting.


He added that the governing council had not even discussed winding down the bank’s asset purchasing scheme, which is known as quantitative easing (QE) and is designed to encourage spending and investment. “We didn’t discuss tapering,” he said.


Just last month, policymakers chose to extend the scheme from March to December this year, albeit slowing the pace of purchases from 80 billion to 60 billion euros ($85 billion to $64 billion) per month from April.


But a sudden jump in inflation from 0.6 per cent in November to 1.1 per cent in December — and as high as 1.7 per cent in Germany — has emboldened critics of the bank’s loose monetary policy.


Prominent economists and politicians in Germany, where savers are seeing their cash piles shrinking, are already clamouring for a rate rise.


But Draghi pointed to rising oil prices as the main driver of headline inflation, while core inflation — which excludes volatile energy and food prices —remains sluggish.


“There are no signs yet of a convincing upward trend in underlying inflation,” Draghi said.


“Even though inflation has increased markedly, we know it’s mainly driven by energy, and at this point in time the governing council decided to look forward.”


Meanwhile, wage growth remains subdued and “risks coming from global uncertainty” threaten the fragile euro zone recovery, the bank president said.


“It will need a significant increase in core inflation and wages before the ECB would consider a further, faster or earlier reduction of QE,” analyst Carsten Brzeski of ING Diba bank predicted.


Draghi called on the German people to sit tight rather than demanding interest rate rises immediately. “Just be patient, as the recovery will firm up, real rates will go up as well,” he said.


The ECB’s low interest rates, mass asset purchases, and cheap loans to banks are all intended to pump cash into the economy in a bid to power growth and push inflation towards the central bank’s target of close to, but just below, 2 per cent.


German governing council members are known opponents of loose monetary policy.


But economically weaker countries in the euro zone, such as Greece and Italy, have not matched the dramatic leap in inflation Germany recorded in December.


Inflation “has to be there for the whole euro zone” and “be self-sustaining” independent of the bank’s monetary policy support before there is any question of increasing interest rates, Draghi said.


That may rile Germany, where Chancellor Angela Merkel’s centre-right alliance faces an insurgent challenge from eurosceptics in September elections.


Finance minister Wolfgang Schaeuble used a newspaper interview last week to press the ECB to wind down its stimulus efforts.


“It would probably be right if the ECB starts daring to head for the exit this year,” he said. — AFP


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