ECB’s Draghi defiant in face of German criticism of stimulus

FRANKFURT, Germany (AP) — Europe’s top central banker struck a defiant tone Thursday over German-led criticism that the European Central Bank has over-stepped the mark in its ultra-low interest rate policies.

After the bank’s decision to keep its interest rates unchanged at record lows, ECB President Mario Draghi said the bank can deploy more stimulus if global troubles threaten to push a modest economic recovery off the rails and further weighs on inflation.

Overall, though, he sounded a relatively optimistic — and firm — tone that helped the euro rise 0.6 percent to $1.1373.

“We obey the law, not the politicians,” he said.

Draghi and the ECB have come under German criticism over recent policy moves. Some conservative German politicians have grumbled about the low returns to savers and on pension savings. Finance Minister Wolfgang Schaeuble went so far as to credit half of the support for the anti-euro, anti-immigration Alternative for Germany party to public discontent over ECB policies.

Draghi defended the bank’s policies and noted that the ECB is tasked with setting policy for all the countries in the eurozone, not just Germany. The same policies backed by the ECB have been enacted around the world, he noted.

The European Union treaty that created the ECB and the euro forbids the central bank from taking advice from governments, and says that member governments agree to respect that. Political independence shields a central bank from pressure from politicians who may want more expansive monetary policy that could help them get re-elected — but which could cause long-term harm to the economy.

The bank did not change the measures that have caused controversy. The bank’s 25-member governing council kept its key benchmark interest rate at zero. The refinancing rate determines the cost of central bank credit to commercial banks, and through that steers many other short-term lending rates.

It also didn’t touch its rate of minus 0.4 percent on funds left on deposit at the central bank by commercial banks. That highly unusual negative rate is aimed at getting banks to lend the money, not stash it, and help stoke inflation in the eurozone.

The ECB aims to have annual inflation across the eurozone at just below 2 percent. In the year to March, the rate was zero.

Draghi said inflation in the eurozone will likely fall below zero in the coming months due to shifts in energy prices. However, he said it should start picking up in the second half of the year and continue rising in 2017 and 2018.

“The governing council will continue to monitor closely the evolution of the outlook for price stability and, if warranted to achieve its objective, will act by using all the instruments available within its mandate,” he said.

He added that it’s “crucial” to ensure that current very low inflation rates do “not become entrenched” in second-round effects on wage and prices.

In addition to holding interest rates at drastic lows, the eurozone’s chief monetary authority kept its bond-buying program unchanged. It is pumping newly printed money into the banking system by purchasing bonds from banks at the rate of 80 billion euros ($90 billion) per month through at least March 2017, and longer if needed. It is also planning long-term loans to banks that will earn negative interest — that is, the ECB will pay banks to take the loans instead of the other way around.

Overall, though, Draghi provided no indication that further stimulus is imminent as he outlined the ECB’s projections that the economic recovery in the eurozone will likely proceed and be supported by the recent stimulus measures. Financing conditions are improving, he said.

What matters in the eurozone is important for the world economy. Taken together, the eurozone is the world’s second largest economy after the United States and ahead of China, according to World Bank figures.

The eurozone economy grew 0.3 percent in the fourth quarter of last year; unemployment is high at 10.3 percent but falling slowly, with pockets of much higher joblessness in places like Spain and Greece that have run into trouble with too much debt.

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