Mario Draghi has put forth the case for another round of monetary easing, signalling lacklustre growth in wages and rising concerns about weak inflation justified more action by the European Central Bank.
The ECB president also set out his views on Britain’s attempt to renegotiate its EU membership terms, saying a fix “that would anchor the United Kingdom firmly within the EU while allowing the euro area to integrate further would boost confidence”.
Mr Draghi dropped a big hint late last month that his policymakers will inject more stimulus into the eurozone economy at their next meeting in March, saying the central bank’s governing council would “review and possibly reconsider” its policy stance.
A big reason for more action would be if policymakers think the wave of disinflation caused by the fall in oil prices risks feeding through to wages and longer-term expectations of inflation in the region.
Mr Draghi told lawmakers at the European Parliament on Monday that what economists dub “second-round effects” were indeed occurring.
“While the most recent wave of disinflation is mainly due to the renewed sharp fall in oil prices, weaker than anticipated growth in wages together with declining inflation expectations call for careful analysis of the channels by which surprises to realised inflation may influence future price and wage-setting in our economy,” he said.
The views of Mr Draghi, who heads the 25-member governing council, are at odds with those of other policymakers, however.
While the ECB’s chief economist Peter Praet agrees with Mr Draghi, saying in an interview published at the weekend that the fall in inflation expectations was “markedly disappointing”, others take a different view.
The council’s hawks such as Jens Weidmann, president of Germany’s powerful Bundesbank, dispute the current weakness in inflation risks turning more pervasive. Mr Weidmann said last week monetary policy should look past “short-term fluctuations caused by oil prices”.
The ECB’s staff will publish new forecasts for the eurozone economy in March, when they will almost certainly downgrade their projections for inflation from their current estimates of 1 per cent in 2016 and to 1.6 per cent in 2017.
Inflation was 0.4 per cent in the year to January, the highest level since late 2014.
However, the sharp fall in oil prices in recent months will almost certainly send inflation into negative territory later this year. Inflation has been less than half the ECB’s target of below but close to 2 per cent
A prolonged bout of low inflation could weaken demand in the region, weighing on wage growth and leading consumers to delay purchases in the hope that prices will fall.
Mr Draghi said the ECB’s landmark quantitative easing package, under which the central bank will buy about €1.4tn of mostly government bonds, and negative interest rates were working.
“Without these measures, the euro area would have been in outright deflation last year and prices would have fallen at an even quicker pace this year,” he said. “Growth would have been significantly lower.”
The policy has come under attack from the German economic and political establishment, which believes the purchases of eurozone sovereign bonds are leading governments in the periphery to delay much-needed reforms of their economy.
Mr Draghi said threats to the eurozone’s economy had risen since December, when the ECB governing council last acted, because of the slowdown in emerging markets, financial market volatility and geopolitical risks.
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