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FRANKFURT, Germany (AP) — The head of the European Central Bank says that its monetary stimulus efforts are still very much needed to support the continent’s economic recovery — despite the recent spike in inflation in the countries that use the euro currency.
Mario Draghi told members of the European Parliament on Monday that the uptick in annual inflation to 1.8 percent was mainly due to higher oil prices, not to fundamental price pressures in the economy from rising wages.
The inflation figure for January was a big jump from 1.1 percent in December and on paper complies with the bank’s goal of just under 2 percent. Yet the increase may not last, and when excluding volatile items like food and fuel, inflation is still only 0.9 percent.
Draghi said that the bank’s strategy “prescribes that we should not react to individual data points and short-lived increases in inflation.”
He said “underlying inflation pressures remain very subdued” because workers’ wages and business hiring remained slacker than they could be. He even held out the possibility that the stimulus could be stepped up if the outlook worsens.
He underlined that the bank would keep on pumping newly printed money into the economy through bond purchases through the end of the year. The bank is buying 80 billion euros ($86 billion) per month through March, scaling back to 60 billion per month thereafter. The purchases drive down longer-term interest rates and, in theory, make it easier for businesses to borrow, supporting economic activity and pushing up inflation. The bank has also held its benchmark short-term rate at zero.
Lower central bank rates stimulate the economy but can cause inflation when growth picks up; central banks then use higher rates to combat excessive inflation.
The ECB’s stimulus has encountered criticism in Germany, where some economists think it should be phased out. Critics say the stimulus penalizes savers who get no returns on conservative holdings and supports financially weak governments with low borrowing costs.
Draghi, however, credits the policies for supporting an economic recovery and a drop in the number of unemployed people by 3.5 million since 2013. The eurozone grew 1.7 percent in 2016 and unemployment has slowly fallen to 9.6 percent.
The ECB is the top monetary authority for the euro, the currency share by 19 of the EU’s 28 countries.
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