The European Central Bank (ECB) is yet to be convinced there is sustainable inflationary pressure in the Eurozone economy, according to the policymakers’ chief economist.
Peter Praet, one of the most influential members of the ECB’s rate-setting governing council, said: “Despite the recent increase in headline inflation, largely on account of rising energy and food prices, underlying inflation pressures remain subdued.”
Consumer prices grew by an annual rate of two per cent in February in the Eurozone. However, core inflation (which excludes volatile fuel and food prices) hit only 0.9 per cent at the same time. The ECB targets inflation "near but below" two per cent.
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Speaking at a business conference in Madrid, he reiterated the ECB’s stance that it will “look through” any changes to prices which are judged to be “transient.”
Praet said further stimulus measures were necessary as the pick-up in inflationary pressure from rising wages has been subdued.
The Eurozone economy is continuing at a “steadily firming pace”, Praet said. Recent surveys of purchasing managers have shown European companies expanding their activity at the fastest pace in almost six years.
Praet said he is “confident that the ongoing economic expansion will continue to firm and broaden,” with momentum in the recovery gaining.
He added that monetary policy has been crucial to that growth.
The ECB has kept an ultra-loose monetary policy stance since a debt crisis plunged the Eurozone economy into chaos in 2011. It has so far resisted pressure to unwind its historically low interest rates or to stop monetary stimulus through its quantitative easing bond purchase programme.
The rise in inflation across the Eurozone has prompted criticism from economists in countries experiencing faster price rises, with consumer price inflation in Germany rising to 2.2 per cent in February.
The central bank has insisted it will not tighten monetary policy.
The first step in any tightening would most likely come via lowering its €60bn (£52bn) monthly bond purchases. The central bank is seeking to avoid a replication of the “taper tantrum” in 2013, when asset prices plunged as the US Federal Reserve started withdrawing its own stimulus measures.
“The economic recovery and the outlook for price stability are still predicated on the very favourable financing conditions that to a large extent depend on continued monetary policy support,” Praet said.