The specter of deflation returns to haunt the European Central Bank (ECB) to the point of possibly pushing a new initiative to boost economic recovery in the euro area.
Inflation fell to 0.7% last month in the euro area, far from the goal of just under 2% of the central bank, leading analysts to predict a rate cut at its meeting monetary policy Thursday.
The storm in the emerging markets will not be forgotten by the 24 members of the Governing Council as if it causes an increase in the euro; there will be much downward pressure on prices that will emerge.
If inflation in January was not enough to decide the ECB to take action, it may be the new economic forecasts of the Euro system in March that will.
“I think it will be emboldened (and act on the field),” said Richard Barwell, an economist at RBS, one of the few professionals that have predicted last rate cut by the ECB in November. Barwell thinks the refinancing rate will be reduced from 0.25% to 0.10% Thursday; the deposition rate will remain zero.
Data published in January showed that the euro zone was discussed in 2014 in much better shape than expected, the significant growth in all being spoiled by the ongoing slump in France.
Mark Wall and Gilles Moec, economists at Deutsche Bank, explained in a note that the statistics published in the last month call for immediate action by the ECB. “It is a matter of timing. If not done in February, easing will be in March, accompanying inflation forecasts revised downwards the Eurosystem,” they write.
“LOW FRAGILE AND UNEVEN”
After the January meeting, the ECB President Mario Draghi had mentioned two cases which may push the central bank to act: a deterioration in the inflation outlook in the medium term or “unjustified” increase money market rates.
A reduction in excess liquidity has created upward pressure on the shortest money market rates this year.
Mario Draghi and other members of the ECB stressed how the recovery in the euro area was “weak, fragile and uneven.”
Coeuré Benoit, who sits on the Executive Board of the ECB, said Friday that the central bank had the ability to act even when interest rates were zero in the case “downside risks to price stability in the medium term.”
Apart from lower interest rates, the ECB may as well offer banks new lending over the longer term (LTRO) or buy assets.
Another possibility is to interrupt the weekly refinancing operations that neutralize the impact of sovereign bonds bought by the ECB. It is likely to increase the money supply and fueling inflation.
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