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ECB to Continue Stimulus               01/17 06:14

   Inflation has suddenly jumped in Europe. Growth is picking up. But don't 
expect the European Central Bank to start withdrawing its extensive stimulus 
programs just yet.

   FRANKFURT, Germany (AP) -- Inflation has suddenly jumped in Europe. Growth 
is picking up. But don't expect the European Central Bank to start withdrawing 
its extensive stimulus programs just yet.

   This week, ECB President Mario Draghi is expected to lay out the reasons why 
the chief monetary authority for the 19-country eurozone intends to stick with 
its stimulus plan decided at the Dec. 8 meeting --- to keep pumping newly 
printed money into the economy through bond purchases at least until the end of 
the year.

   The bank isn't expected to change its interest rates or other monetary 
stimulus measures when its governing council meets Thursday.

   But Draghi will find he has some explaining to do to convince stimulus 
skeptics --- particularly in Germany --- who think it's time to start looking 
to wrap up the measures. While they support the economy, the stimulus measures 
can lower returns on savings in investment and pension funds, an issue for many 
among Europe's aging populations.

   The first reason for Draghi not withdrawing stimulus is simple: The recent 
turn upward in inflation from near zero is mostly due to higher oil prices, not 
to rising wages or other fundamental pressures in Europe's economy.

   That means that the ECB doesn't feel much closer to its goal of inflation of 
just under 2 percent. December's inflation reading came in at 1.1 percent. The 
increase in oil prices may offer only a one-time boost. More importantly, 
so-called core inflation --- which excludes fuel and food, where prices can 
rise and fall for short-term reasons --- hasn't budged over the past few 
months. It's been stuck at 0.8 or 0.9 percent. And that's the figure the ECB 
keeps its eye on.

   "There remain plenty of reasons for the ECB to remain cautious," Marco 
Valli, chief eurozone economist, wrote in an emailed research note. "Overall, 
it would probably take very significant changes to the growth and inflation 
outlook for the ECB to re-think its policy set-up announced last December."

   That's not much comfort to savers in places like Germany, where the 
inflation rate has reached 1.7 percent but returns on bank deposits remain near 
zero. That means the value of people's savings shrinks over time --- a constant 
risk with conservative investments, to be sure. A headline in Germany's 
Frankfurter Allgemeine Zeitung called the recent inflation spike "an attack on 
our money."

   German Finance Minister Wolfgang Schaeuble was quoted as saying in the 
Sueddeutsche Zeitung daily that "I share the concerns" of savers, adding that 
financial advisers would recommend finding higher-yielding investments such as 
stocks for at least part of one's savings: "We must accept that there are no 
real interest returns on risk-free investments."

   Schaeuble said the ECB was fulfilling its mandate of seeking price stability 
"and doing it well."

   But he added that it would be "correct, if the ECB began this year to look 
for the entrance to the exit" from its ultra-cheap money policy. It's that kind 
of exit talk that Draghi has resisted, denying that December's decision to 
reduce the monthly size of its money injections into the financial system was 
in any way "tapering" the stimulus.

   There's another reason for the ECB to press on: protecting the economy from 
political shocks.

   Elections in France, the Netherlands, Germany and, possibly, Italy could 
give right-wing, anti-EU forces a chance to demonstrate increased strength at 
the ballot box. That would continue a trend seen first in the British vote to 
leave the European Union last June. The British government and the EU haven't 
started talks yet on what would replace their current barrier-free trading 
relationship, leaving major uncertainties for businesses.

   In France, polls suggest Marine Le Pen of the Front National will at least 
make the second round of presidential voting. She isn't expected to win. But 
Donald Trump wasn't expected to win either.

   Plentiful money and cheap credit could in theory help offset any caution 
among investors, consumers or businesses to risk lending or borrowing.

   The written account of the Dec. 8 meeting indicated that the 25-member of 
the governing council saw monetary policy as offering a "steady hand" during 
political turbulence. The council extended the earliest end date to the 
purchases from March to year-end, though reducing the amount from 80 billion 
euros a month to 60 billion euros.


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