ECB's Mersch Says Stimulus Still Needed to Bolster Reflation

  • Executive Board member says underlying price pressure is muted
  • ‘Newfound confidence’ in reforms is a reason for optimism

The European Central Bank can be more “assured” about meeting its inflation goal, but it’s still too soon to call its mission accomplished, according to Executive Board member Yves Mersch.

“A very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation,” Mersch said at an event in Singapore on Tuesday. “Reflationary forces are at play. Price pressures in the early stages of the pricing chain remain strong but have still not transmitted to the later stages.”

The Luxembourger’s remarks echo the introductory statement by ECB President Mario Draghi last week after the Governing Council decided to keep its stimulus settings unchanged. Draghi gave few clues as to when officials will start winding down their 2.3 trillion-euro ($2.7 trillion) bond-buying program, arguing that “we aren’t there yet” as there are few price pressures in sight.

Mersch reiterated the ECB’s particular concerns that wage growth remains muted. He also stressed that governments have been too slow to implement structural reforms, though he suggested that the defeat of euro-skeptic candidates in national elections this year and the victory of Emmanuel Macron as French president on a reform platform offers room for optimism.

“Political winds are becoming tailwinds,” he said. “There is newfound confidence in the reform process, and newfound support for European cohesion, which could help unleash pent-up demand and investment, if confirmed by decisive action.”

— With assistance by Niluksi Koswanage

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