Weak inflation puts ECB in tight spot
AFP
AFP, FRANKFURT: Falling prices in the eurozone are turning up the heat on the European Central Bank to prevent the single currency area from slipping into a dangerous downward spiral of deflation.
But many ECB watchers say they do not expect the guardian of the euro to take any action just yet when its decision-making governing council convenes in Malta this coming week.
Consumer prices in the eurozone slipped by 0.1 per cent in September, according to data published by Eurostat.
That heaps pressure on the ECB to step up its stimulative action at its meeting on Thursday, said IHS Global Insight analyst Howard Archer.
With area-wide interest rates currently at what ECB chief Mario Draghi perceives to be their lower end, any additional easing action would likely take the form of an extension of the central banks bond purchase programme, known as quantitative easing or QE, the expert said. But it looks most likely that the ECB will hold fire on more QE, as a number of governing council members appear to be in wait and see mood, Archer said.
A nmber of top ECB policymakers, including Draghi himself, have recently insisted it is too early to judge whether further action is needed. Also by December the ECB will have compiled its own new staff forecasts, which could well bolster the case for more stimulus.
Recent comments from governing council members suggest that the ECB may not be ready to increase its policy support when it meets in Malta, said Jennifer McKeown of Capital Economics. But Draghi would likely reiterate concerns about the inflation outlook and risks from emerging markets, stressing again that the ECB was ready to do more if needed.
We still see it announcing a pick-up in the pace of its asset purchases before long, if not at this meeting then perhaps following the December meeting, McKeown said.
QE is an ambitious scheme, launched in March, to buy more than one trillion euros ($1.1 trillion) worth of public sector bonds to pump liquidity into the system at a rate of 60 billion euros per month until September 2016.
While falling prices might appear to be good for consumers, they can be poisonous to the economy, because they may persuade consumers to delay purchases in the hope of lower prices, in turn prompting companies to hold off investment and hiring. The ECB calculates that inflation rates of close to but just under 2.0 per cent are conducive to healthy economic growth.
Draghi has repeatedly said that the ECB would be ready to take further stimulative action if necessary.
And analysts believe that such action could take the form of an extension of the QE programme beyond September 2016 or an acceleration or increase in the total amount of bonds purchased. But executive board member Benoit Coeure recently said it was too early to speculate about such a move, pointing out that only a third of the current QE programme had been executed so far.
