On Thursday 9 March, the ECB announced that it was to maintain its highly accommodative monetary policy until inflation starts to build up, for instance through generalised wage increases.
“A very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up support for headline inflation in the medium term”, said the President of the ECB, Mariel Draghi, following a meeting of the Governing Council.
Since early 2017, the annual inflation level has increased substantially, from 1.1% in December 2016 to 1.8% in January and 2.0% in February. This level, which is again in line with the main mission of the ECB, is basically due to the increase in the prices of energy and non-processed food products. Consequently, the European institution has increased its inflation forecasts “significantly for 2017 (1.7%: Ed) and slightly for 2018” (1.6%), Draghi said. Even so, the former Governor of the Bank of Italy stressed that the underlying inflation (not including energy and food prices) was expected to remain weak and would rise only gradually in the medium term as a result of the current monetary policy and ongoing economic recovery.
The ECB has therefore decided not to change its principal interest rates (0.00% for principal refinancing operations, 0.25% for the marginal loan facility, -0.40% for the deposit facility) over a prolonged period that will go beyond the end of the 'quantitative easing' (QE) programme for the repurchase of mainly public securities. From April onwards, the pace of monthly purchases of securities will drop from €80 billion to €60 billion until the end of 2017 and beyond, if necessary.
When asked about the factors that will determine a change of course for monetary policy, Draghi said that the process would be gradual and would depend on the emergence of convincing factors allowing inflation to build up. He stressed that an increase in wages constitutes the key to this. He went on to stress that despite an improvement in the balance of risks weighing on the economy of the Eurozone, the Governing Council feels that the direction of the monetary policy is appropriate to this stage.
A Europe of several speeds? As it was the day of the European summit, Draghi was invited to outline his position on the future of the European Union and the creation of vanguards of countries wishing for more integration in specific fields (see EUROPE 11741). “The member states are not all ready to move forward together. I imagine that this is what the expression 'Europe of several speeds' refers to. Whatever arrangements are reached, and it is not clear in which areas, the door will remain open” to countries wishing to join the movement at a later date, he said, a few hours ahead of his attendance of the European summit (see other articles).
On the increase in 'spreads' between the interest rate of securities of Eurozone countries compared to the rate applied to the German debt due to the political risk related to the forthcoming general elections in the Netherlands and France, Draghi referred to tension, but stressed that it was nothing serious, adding that in his view, the euro is “irrevocable”. (Original version in French by Mathieu Bion)