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Financial News: ECB Policymaker Calls For Tapering, But Inflation Loses

ECB Policymaker Calls For Tapering, But Inflation Loses Steam

03/30/2017 - 10:26:00 (RTTNews)

(RTTNews) - A European Central Bank policymaker said on Thursday that it was time to start gradually withdrawing monetary policy stimulus, a process known as tapering, as the euro area economic recovery was gaining momentum and the threat of deflation had disappeared, while other rate-setters supported maintaining the status quo. Meanwhile, preliminary data from some key euro countries showed that energy price-driven inflation has begun to lose steam.

"Europe is staging a reasonable economic recovery, which, stimulated in part by the ECB's measures, has been continuing for some four years now," European Central Bank Governing Council member Klaas Knot said Thursday.

"It is therefore time to gradually start normalizing monetary policy in the euro area," Knot, who heads the Dutch central bank, said in a press conference held to release the bank's annual report.

The threat of deflation that was relevant at the time of starting the ECB asset purchases has subsided and inflation is actually picking up, "eroding the basis for unconventional monetary policy", he said.

"We must be patient in phasing out accommodative monetary policy; after a course of heavy medication, doses should be reduced gradually," Knot added.

The rate-setter also noted that asset purchases should be phased out as soon as possible next year, if they continue till December this year as announced by the ECB.

Meanwhile, some ECB policymakers, including the bank's chief Mario Draghi, continues to maintain that euro area still needs massive stimulus as higher inflation is driven by energy and food prices, and hence unsustainable. Core inflation remains subdued, they point out.

ECB Chief Economist Peter Praet said on Thursday that the bank was not yet sufficiently confident that inflation will converge to levels consistent with its aim in a durable manner.

The ECB aims to keep inflation 'below, but close to 2 percent'.

"Inflation dynamics still remain reliant on the very substantial degree of monetary accommodation which prevails," Praet said in Berlin.

Fellow ECB policymaker Erkki Liikanen also stressed on the need to retain monetary stimulus, on Thursday.

"A very substantial degree of monetary accommodation is still needed in the euro area for underlying inflation pressures to build up and support inflation in the medium term," Liikanen, who heads the Bank of Finland, said.

Echoing the ECB's forward guidance, Liikanen said, "Should the economic outlook weaken or the financial market situation no longer contribute to increasing inflation, the duration or volume of purchases can be adjusted."

Vindicating the ECB's stance, inflation tumbled in Germany and Spain in March. Preliminary data released on Thursday showed that the headline figure fell to a four-month low of 1.6 percent in Germany and a three-month low of 2.3 percent in Spain.

The harmonized inflation figure, which is more relevant to the ECB, eased to 1.5 percent from 2.2 percent in Germany and to 2.1 percent from 3 percent in Spain.

Elsewhere, the Bank of Spain said Spain's inflation is set to slow for the rest of the year and reach below 1.5 percent next year as oil prices that peaked at the start of the year are expected to ease substantially in coming months.

"The path of oil prices over the course of 2016, which feeds into the energy component of the CPI, largely helps explain the increase observed in the year-on-year rate of the overall CPI in the opening months of 2017, and why a subsequent slowdown over the rest of the year is expected," the bank said in its bulletin.

The statistical office Eurostat is set to release the initial figures for Eurozone inflation for March on Friday. Economists expect the headline figure to drop to 1.8 percent from 2 percent in February, which was the highest since late 2012.

Core inflation is expected to ease to 0.8 percent from 0.9 percent seen in the previous two months.

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