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On Tuesday, the President of the European Central Bank Draghi defended the bank's quantitative easing policy at a think tank event in Berlin, Germany. He said that ultra-low interest rates did not harm the interests of German households and emphasized that the European Central Bank will continue to implement relevant policies until it achieves its 10% inflation target.
The market had previously expected that the European Central Bank would extend its 1 trillion euro bond purchase plan at its policy meeting in March. Draghi's remarks undoubtedly strengthened relevant expectations. The original bond purchase plan will expire next month.
At the beginning of this month, there were reports that the European Central Bank was preparing to gradually reduce the scale of its bond purchases, which made financial markets uneasy. At a press conference after last week's monetary policy meeting, Draghi said the claims were untrue and strongly hinted that the bond purchase program would be extended at the monthly meeting.
Although the European Central Bank has adopted a series of radical measures such as negative interest rate policy, a monthly bond purchase plan of 100 million euros and providing cheap loans to banks, inflation in the euro zone has still hovered near zero for more than two years. Therefore, most investors expect the European Central Bank to extend its quantitative easing program for at least six months.
However, the European Central Bank's policies have been criticized by Germany. Germany is one of the most important economies in the Eurozone. Senior German politicians, including Finance Minister Schäuble, have publicly criticized the ECB's policies for harming the interests of German savers.
In his speech on Tuesday, Draghi tried to downplay Germany's concerns. He argued that low interest rates were not hurting German households, nor were they diverting fiscal revenue to southern European countries at the expense of Germany. He said
Because Germany has such a large net saver population, households are often thought to be the area with the biggest losses, but in fact, net interest income only recorded a very slight decrease.
Draghi said that the European Central Bank's policies caused the euro to fall against other currencies and supported exports, which was beneficial to Germany and other euro zone countries.
He also emphasized that since the European Central Bank began implementing a radical economic stimulus plan two years ago, more than half of German households have experienced a net increase in wealth. At the same time, the German government and companies also received large windfall gains from low interest rates.
In addition, Draghi also refuted the claim that central bank policies have caused wealth to flow to high-income earners, leading to increased social inequality. He said that low interest rates can promote economic development and reduce unemployment, so they will also help the poor in the long run.
A report from the Bundesbank last month reached a similar conclusion. The report believes that some of the European Central Bank policy measures that have been criticized may not exacerbate social injustice.
However, Draghi also admitted that low interest rates are not without cost for the euro zone: in the long run they will lead to economic distortions. He said ultra-low interest rates were not the new normal. He said
We certainly don't want to keep interest rates at such low levels for too long because some nasty side effects may accumulate.
But for some German policymakers, low interest rates have gone on for too long. On Tuesday, Schäuble warned at a separate event in Berlin that global liquidity and debt were too high.
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