ECB holds key interest rates at record lows as calls grow for stimulus exit

Frankfurt: The European Central Bank left key interest rates and its mass bond-buying programme unchanged Thursday, at its first meeting of a year when the Frankfurt institution could become a political punching bag.

Most observers expected no change in course from the six board members and 19 eurozone central bank governors who sit on the ECB`s Governing Council.

Just last month, policymakers chose to extend the bank`s mass bond-buying from March to December this year, albeit slowing the purchases from 80 billion to 60 billion euros ($85 billion to $64 billion) per month from April.

With the economic consequences of Brexit and the US election of Donald Trump as yet unclear and a series of elections ahead for major eurozone members, the ECB might have been able to move out of the spotlight for much of 2017.

But a sudden jump in inflation, from 0.6 percent in November to 1.1 percent in December -- and as high as 1.7 percent in Germany -- has emboldened critics of the bank`s loose monetary policy.

Prominent economists and politicians in Germany, where savers are seeing their cash piles shrinking, are already clamouring for a rate rise.

ECB president Mario Draghi is expected to face pointed questions on inflation from German journalists at his traditional press conference, slated to begin at 1330 GMT.

"Mr Draghi is likely to highlight again that core inflation is not on an upward path and also express concern about the impact of political uncertainty on growth and financial markets this year," Capital Economics analyst Jennifer McKeown said.

- Uneven inflation -

The central bank`s low interest rates, mass asset purchases, and cheap loans to banks are all intended to pump cash into the economy in a bid to power growth and push inflation towards the central bank`s target of close to, but just below 2.0 percent.

German governing council members are known opponents of loose monetary policy.

But economically weaker countries in the eurozone, such as Greece and Italy, have not matched the dramatic leap in inflation Germany recorded in December.

Rather than pointing towards the exit, Draghi took pains after the last meeting to say that monthly bond purchases could always be increased again if economic conditions worsened.

- No dilution soon -

"It is absolutely premature today to claim victory over a weak economy," ECB board member Yves Mersch -- one of the more hawkish voices at the top of the bank -- said earlier this month.

Policymakers keep a close eye on the core inflation figure, which excludes more volatile food, alcohol, tobacco, and energy prices.

The recovery in oil prices from a deep slump a year ago accounts for a large share of the increase in inflation seen in December.

"The ECB will highly likely point to the fact that core eurozone inflation only edged up to 0.9 percent in December from 0.8 in November," commented analyst Howard Archer of IHS Markit.

"There will be no dilution of the ECB`s policy any time soon" against that background, Archer said.

That may rile Germany, where Chancellor Angela Merkel`s centre-right alliance faces an insurgent challenge from eurosceptics in September elections.

Finance minister Wolfgang Schaeuble used a newspaper interview last week to press the ECB to wind down its stimulus efforts.

"It would probably be right if the ECB starts daring to head for the exit this year," he said.

Analysts said such calls were likely to grow if the euro area saw a consistent run of strong data.

For now, "we expect Draghi to emphasise that uncertainty remains elevated and the medium-term outlook has not changed much," said Marco Valli of UniCredit.

He will argue that "recent developments vindicate the policy decisions taken on December 8" and brush aside calls to end monetary easing sooner, Valli continued.