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European Central Bank Holds Back, Even as Inflation Quickens As European Central Bank Charts Economic Course, Politics Complicate the Picture
(about 1 hour later)
FRANKFURT — The European Central Bank may have held fire at its regular monetary policy session on Thursday, but the meeting could nevertheless represent a turning point. FRANKFURT — Central bankers like to portray themselves as being aloof from the hurly-burly of politics, coolly assessing the economic data as they ponder whether to add a jolt of stimulus or take some away.
Though the central bank kept interest rates steady and did not retreat from the aggressive monetary stimulus it began more than a decade ago, many economists still expect it to taper its support for the eurozone economy over time as inflation accelerates. As the bank pulls back, the path could be bumpy, with political complications at home and abroad, including whether the Federal Reserve in the United States decides to raise lending rates next week. But with populism on the rise in Europe and elsewhere, opinion polls have arguably become one of the European Central Bank’s most important sources of data points.
Here is what to watch for in the coming months: Faced with a series of national elections in which anti-euro candidates play prominent roles, Mario Draghi, the president of the central bank, mounted a spirited counteroffensive on Thursday. He portrayed the currency as the key to European prosperity and even took an implicit jab at the protectionist rhetoric of President Trump.
Since the first stirrings of a global financial crisis in 2006, the European Central Bank has deployed a broad range of tools to prevent economic collapse. But a recent increase in consumer prices, and a projected acceleration in the next two years, is putting pressure on the central bankers to begin a slow return to normal. “Open trade has been the pillar of world prosperity for many, many years,” Mr. Draghi said.
The bank’s mandate requires it to focus on inflation above all else. So even though the unemployment rate in the eurozone is double that of the United States, there is pressure from Germany and other countries for the European Central Bank to curb price increases. Although it made no major changes to monetary policy on Thursday, the bank is under increasing pressure to begin withdrawing the stimulus program that has prevailed for a decade. That task, delicate in the best of times, is even more difficult in the charged political atmosphere that permeates not only Europe but the United States and the rest of the world.
The United States is applying additional pressure. The longer the European Central Bank waits, the more out of sync it will be with the Fed. Some political candidates are questioning the whole idea of a united Europe and the European Central Bank’s fundamental reason for being. The situation raises the stakes whenever the bank makes a decision.
It is likely that the mood on the bank’s policy setting panel has become more tense in recent months. In Germany, soaring real estate prices in cities like Frankfurt have stoked fears of inflation and led to calls for the bank to dial back the stimulus. Britain, which was never in the eurozone, has already voted to leave the European Union. Marine Le Pen, the far-right candidate for president of France, has spooked investors with talk of restoring the franc. Similar rhetoric is heard from candidates in the Netherlands, Germany and Italy who have been emboldened by the election of Mr. Trump.
But countries like Italy, Portugal and Greece are still suffering economically and are eager for the stimulus to continue. In addition, the eurozone’s stability is threatened by Britain’s vote to leave the European Union and the rise of populist movements in France, Germany and other countries. A wrong move by the European Central Bank could upset a fragile economic recovery and provide fodder for the populists.
A majority of the governing council favored keeping the stimulus flowing. But conservative members like Jens Weidmann, president of the German Bundesbank, have probably already begun pushing more aggressively for a shift in policy. While insisting that the central bank’s job is just to keep inflation under control, Mr. Draghi was unusually direct on Thursday in refuting the opponents of European free trade and political unity.
Any change in the central bank’s main benchmark interest rate, which is currently zero, is probably years away. “If we go back to when the euro was created, there were always people who said it’s wrong, it’s a mistake, it can’t be done,” Mr. Draghi said. “They are saying the same today.”
So the big question is when will the central bank start reducing its purchases of government and corporate bonds, a type of stimulus. On Thursday, it reiterated its plan to extend the purchases through the end of the year, but repeated its plan to reduce the size of the bond buying starting in April. When the program was announced in December, many economists interpreted that decision as a form of what is known as tapering. Eurozone members have made “extraordinary shows of solidarity” toward countries in crisis, Mr. Draghi said. “The euro is here to stay.”
Mr. Draghi insisted at the time that no such turning point had been reached. But it appears to be coming. No matter what Mr. Draghi does, he will be a target. As one of Europe’s most powerful institutions, the central bank serves as an all-purpose piñata for nationalist politicians of all stripes.
Frauke Petry, leader of the right-wing Alternative for Germany party, regularly accuses Mr. Draghi of endangering Germans’ savings with ultralow interest rates.
In Italy, where low interest rates have helped ease a severe credit crunch, sentiment runs the opposite direction. When the European Central Bank does begin gradually reducing its stimulus efforts, perhaps around the middle of the year, expect leaders of the populist Five Star Movement in Italy to accuse Mr. Draghi of selling out to the Germans.
The prospect that Ms. Le Pen could become president of France has pushed up the government’s borrowing costs. The higher rates feed through to the economy and work against central bank measures designed to make sure credit remains cheap.
The unprecedented political landscape in Washington is also a concern for the European Central Bank. The United States is the European Union’s largest trading partner. If Mr. Trump erects trade barriers as he has threatened to do, European exporters would suffer along with the region’s economy.
Mr. Draghi will have his first direct contact with the new American administration next week at a summit in Germany of central bank governors and finance ministers. He declined to say on Thursday what message he planned to deliver.
A further complication for the European Central Bank is that its policies are out of sync with those of the Federal Reserve. Fed officials have signaled that an interest-rate increase is likely next week. That could be a problem for the European Central Bank, if higher market interest rates in the United States spill over to the eurozone and undermine efforts to keep borrowing costs low.
Analysts say they expect the European Central Bank to give a clearer view of its intentions around June, probably by signaling a reduction in purchases of government and corporate bonds, a way of pumping money into the economy.
An increase in official interest rates may still be years away. On Thursday, the European Central Bank left its benchmark interest rates unchanged, and said it would continue its stimulus purchases of government and corporate bonds through the end of the year, albeit at a reduced level starting in April.
However, in a statement, the central bank was less alarmist about the eurozone outlook than in the past. Mr. Draghi said the bank would not extend an emergency lending program for commercial banks because there is no need. “There is no longer that urgency in taking further actions,” Mr. Draghi said.
It will nearly be impossible to time the easing of the stimulus in a way that does not open the European bank to criticism. The economies of the eurozone are also badly out of step with one another. Unemployment in Italy, at 11.9 percent, is three times as high as that in Germany.
The European Central Bank has already been drawn into Italian politics. The central bank, which regulates commercial banks in the eurozone, has endorsed a rescue plan for troubled Italian banks that critics in Germany say violates European rules.
In Germany, by contrast, there are complaints that the European Central Bank’s low interest rates penalize middle class savers, who earn practically no return on their nest eggs. The resentment has grown recently because of an increase in inflation. Consumer prices in Germany rose at an annual rate of 2.1 percent in January, above the European Central Bank’s target of just under 2 percent.
The inflation rate for the eurozone as a whole was 2 percent in February. But the increase was almost entirely because of food and fuel prices, which frequently fluctuate. The European Central Bank probably will not react until there is evidence that prices of other categories, like services, are also rising.
That will be too late for some in Germany.
“It is time for the European Central Bank to start phasing out its expansionary monetary policy in Europe,” Clemens Fuest, president of the Ifo Institute, an influential research organization in Munich, said on Thursday in a statement. ”It should now take its foot off the gas.”