ECB action is supporting inflation, growth: chief economist
Without the raft of different policy measures taken by the European Central Bank, consumer prices in the euro area would have declined last year and economic growth would be weaker than it is, the ECB's chief economist Peter Praet said Thursday.
"In the absence of our policy package inflation would have been negative in 2015," Praet told a central banking congress in Frankfurt, countering growing criticism that the ECB's policy measures are proving ineffective in kick-starting inflation and growth in the single currency area.
"In 2016, it would have been at least half a percentage point lower than we forecast currently and around half a percentage point lower in 2017," Praet said.
The ECB is currently pencilling in an annual inflation rate of just 0.1 percent for this year and 1.3 percent next year.
Turning to economic growth, "the impact of the policy measures on euro area GDP (gross domestic product) is also sizeable," Praet said.
"According to the staff assessment, our policy is contributing to raise euro area GDP by around 1.5 percent in the period 2015-18."
Praet warned "we have to be careful to avoid assessing monetary policy by 'looking out the window'. This describes the process of eyeing where certain key variables are today compared with the beginning of the policy, and then concluding that the policy has succeeded or failed."
But this was not how rigorous economic analysis was conducted, he argued.
"Given that the economy is never static, one always needs to assess a counterfactual scenario; what would have transpired without the policy action."
In a bid to kickstart recovery in the eurozone economy, the ECB has implemented a raft of different measures, from cutting interest rates to pumping vast amounts of liquidity into the financial system.
But also these measures coincided with new economic shocks, such as the plunge in oil prices.
"The monetary policy package the ECB has adopted since June 2014 has been effective," Praet insisted.
But the ECB should not be seen as the sole solution to the eurozone's economic woes and other policy areas must also act, he said.
"We have consistently maintained since summer 2014 that a strong and sustainable recovery the crisis requires a comprehensive response that involves all economic policies. A return to higher structural growth and employment cannot depend on monetary policy," Praet said.
© 2016 AFP