Europe closer to deflation as investors wait for ECB move

Inflation has been in Draghi’s “danger zone” of below 1% for almost a year

Europe edged closer towards the deflation abyss on Friday as the inflation rate across the single-currency bloc fell to a five-year low of just 0.3 per cent.

The latest decline — driven by falling food and energy prices — comes as the region attempts to shake off economic stagnation, and fuels calls for European Central Bank president Mario Draghi to launch a large-scale money-printing programme.

Draghi said last week the option was on the table to kick-start growth, but Germany signalled opposition to such a move today as finance minister Wolfgang Schaeuble warned the ECB “doesn’t have the instruments” to fight deflation. A sanctions war with Russia is meanwhile threatening economic prospects.

The ECB’s inflation target is close to 2 per cent but has been in Draghi’s “danger zone” of below 1 per cent for almost a year.

In June the central bank cut interest rates to record lows, and made the historic move to shift deposit rates into negative territory — effectively charging banks to keep their funds overnight.

A new, long-term Funding for Lending-style loan programme starts next month in an attempt to boost credit.

 

ING Bank economist Martin van Vliet said outright quantitative easing remains the ECB’s “nuclear option”.

“To the extent that it further dampens inflation expectations, the latest drop is of significance... Moreover, with inflation inching towards zero, the cushion against deflation is getting smaller and smaller,” he said.

However, Schaeuble cast doubt on the ECB’s efforts, warning: “I don’t think ECB monetary policy has the instruments to fight deflation, to be quite frank. Monetary policy can only buy time.”

Eurozone unemployment was unchanged in July at 11.5 per cent although it remains much higher in countries hardest hit by the debt crisis. Spain has an unemployment rate of 24.5 per cent.

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