Low inflation back in focus at ECB policy meeting

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FRANKFURT: The European Central Bank may have to consider fresh policy measures to prevent deflation in the single currency area, but will not move at its meeting Thursday, analysts said.

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“After all the Greek excitement over the summer, the ECB had probably been hoping for a very ordinary and dull meeting this week,” said ING DiBa economist Carsten Brzeski.

“Unfortunately . . . latest market turmoil and, above all, the plunge in commodity prices should revive the deflation debate within the ECB’s governing council,” he said.

Brzeski was confident that ECB chief Mario Draghi would not announce any new policy action Thursday.

But “on the back of lower inflation projections and increased uncertainty, Draghi will—in our view—open the door for stepping up QE,” or the contested bond-purchase programme known as quantitative easing, he said.

UniCredit economist Marco Valli agreed.

Draghi “is likely to sound more dovish than he did in July,” Valli said.

“We do not expect any explicit hint that the ECB is reconsidering its policy stance at this stage, but the door for further stimulus remains wide open,” Valli said.

The International Monetary Fund on Wednesday insisted that global central banks must ensure that monetary conditions remain “accommodative to prevent real interest rates from rising prematurely.”

And addressing the ECB directly, it said the QE program had “improved confidence and financial conditions, and raised inflation expectations initially.

“More recently, however, inflation expectations have reversed, and the euro has strengthened, which could put downward pressure on prices. Hence, the program should be extended if there is not sufficient improvement in inflation consistent with meeting medium-term price stability objectives,” it said.

Fears of deflation—a dangerous spiral of falling prices—persuaded the ECB to launch in March its controversial QE program, under which it plans to purchase 60 billion euros ($68 billion) of sovereign bonds each month until September 2016, or 1.14 trillion euros in all.

Initially the scheme appeared to work, slowly pushing inflation back up in core eurozone economies such as France and Germany.

AFP

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