ECB expected to act as euro deflation looms

 

Inflation in the eurozone has fallen to a five-year low, reinforcing expectations that the European Central Bank will ultimately take action to avert deflation in the single currency.

The latest flash estimate from Eurostat released yesterday showed annual consumer price growth of just 0.3 per cent in August, down from 0.4 per cent in the previous month and the lowest increase since October 2009 when much of the developed world was still in recession.

The reading was in line with consensus expectations and the euro strengthened slightly against the dollar to $1.3193 on the news. However, analysts said the ECB is likely to prepare the ground for asset purchases at its regular meeting next Thursday in response.

“We expect Mr Draghi to provide strong hints of more policy easing,” said Jessica Hinds of Capital Economics. “Further growth disappointment and continued undershooting of the ECB’s inflation projections will eventually deliver a broad-based asset purchase programme,” said Janet Henry of HSBC. “We see the ECB launching an asset purchase programme at the turn of year,” said Michel Martinez of Société Générale.

However, the German Finance Minister Wolfgang Schäuble poured cold water on the idea of asset purchases in an interview with Bloomberg. “I don’t think ECB monetary policy has the instruments to fight deflation, to be quite frank,” he said. “Liquidity in markets is not too low, it’s even too high. Therefore I think monetary policy has come to the end of its instruments.”

Separate data showed the unemployment rate for the single currency zone was stuck at 11.5 per cent in July.

Eurostat said that declines in energy prices, which were down 2 per cent on a year earlier, drove the fall in total inflation in August. Food, alcohol and tobacco prices were also 0.3 per cent lower than a year earlier. Service prices were up 1.2 per cent.

Last week at the Jackson Hole summit of central bankers the ECB president Mario Draghi noted that market expectations of inflation five years out had fallen below the central bank’s target of 2 per cent. “The Governing Council will acknowledge these developments and, within its mandate, will use all the available instruments needed to ensure price stability over the medium term,” he said.

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