ECB to maintain easing despite inflation rise: chief economist

[FRANKFURT] January's rise in inflation in the eurozone is likely temporary and will not prompt a rethink of loose monetary policy from the European Central Bank, chief economist Peter Praet said Thursday.

"The current environment still falls short of a sustained adjustment in the path of inflation to levels closer to 2.0 per cent over the medium term," Mr Praet told a Frankfurt banking conference.

The ECB has set interest rates at historic lows, buys tens of billions of euros per month in government and corporate bonds, and has offered cheap loans to banks in a bid to drive growth and push eurozone inflation towards its target of just below 2 per cent.

Inflation in the 19-nation single currency area hit 1.8 per cent in January, the second jump in as many months after rising to 1.1 per cent in December.

With price increases distributed unevenly across the eurozone, voices in Germany immediately called for the ECB to change course when the December data was released, as Europe's largest economy saw higher inflation than its neighbours.

That pressure has only increased since the figures for January were published, with German ECB governing council members suggesting the time could soon be ripe to wind down monetary support.

In the first central bank reaction since January's inflation data, Mr Praet said that "the ECB will continue to adhere to its monetary policy strategy, that is look through transitory changes in inflation. The ups and downs of monthly data are not relevant if they are temporary."

Mr Praet's position echoes that of ECB president Mario Draghi, who said at his January press conference that he would not revisit December's decision to extend mass bond-buying beyond its previous March 2017 deadline, albeit at a slower pace.

"The recent upward movement of inflation mainly reflects temporary factors, most notably the increases in energy and food prices," Mr Praet argued.

Beyond those volatile elements, core inflation remains weak, the Belgian economist said.

While January's figures meet the headline target of being close to but below 2 per cent, the ECB prefers to wait to withdraw its support until that level of inflation is self-sustaining over the medium term across the whole eurozone.

Policymakers argue that the ECB's interventions are providing crucial support to the eurozone economy, and that inflation could crumble if its buttresses were removed.

"The firming recovery is not yet sufficiently robust to ensure a self-sustained convergence of inflation rates" towards the ECB's target, Mr Praet said.

AFP