European Central Bank head Mario Draghi says the expanding eurozone economy still faces "risks and uncertainties" — including a looming trade dispute with the United States — and has cautioned that inflation needs to rise further before monetary stimulus is ended.
Continue Reading Below
Draghi said Wednesday that higher inflation, not growth, is the "very clear condition" for the central bank to end its bond-buying stimulus program, and that there is a risk inflation could remain weak. At 1.2 percent annually, inflation is short of the bank's goal of just under 2 percent considered best for the economy.
Inflation could stay low if slack in the economy and the labor market takes longer to shrink than usual. Meanwhile, a protracted trade conflict could hurt growth and inflation as well. U.S. President Donald Trump has announced new import taxes of 25 percent on steel and 10 percent on aluminum.
Draghi said that tariffs' "first round effects are likely to be small." But he warned that, after that, the "second round effects could have much more serious consequences" if the European Union retaliates and the dispute spreads trade restrictions to other categories of goods. That escalation could hit business confidence and investment.
The European Central Bank, the top monetary authority for the 19 countries that use the euro, has said its stimulus program, whereby it buys 30 billion euros ($37 billion) a month in bonds, will continue at least through September, but has given no fixed end date. The purchases, which began in March 2015, are a way of pumping newly created money into the economy to raise inflation.
Annual growth has strengthened to 2.7 percent in the fourth quarter and unemployment has fallen to 8.6 percent in January from 12.1 percent in April 2013. But getting inflation to the official target is the central bank's first priority.
Speaking at a conference at Frankfurt's Goethe University, Draghi echoed earlier cautious comments by saying that monetary policy needs to be "patient, persistent and prudent." He indicated that the first interest rate increases will only start well after the end of the bond purchases. That would put them off until at least 2019. Currently, the bank's benchmark short-term rate is at a record low of zero.
The bank has moved cautiously in signaling a stimulus withdrawal to avoid seeing financial markets prematurely sending interest rates higher in anticipation. That could blunt the remaining impact of the stimulus even before it ends.
The ECB remains well behind the U.S. Federal Reserve, which has ended bond purchases and begun raising its benchmark interest rate. Ending the stimulus will have wide-ranging effects, including higher borrowing costs for governments and house buyers and better returns for savers and pension funds.