Vanishing euro zone inflation seen intensifying ECB policy headache

BRUSSELS/FRANKFURT Thu Aug 28, 2014 10:35pm EDT

General view of the headquarters of the European Central Bank (ECB) before the bank's monthly news conference in Frankfurt August 7, 2014.  REUTERS/Ralph Orlowski

General view of the headquarters of the European Central Bank (ECB) before the bank's monthly news conference in Frankfurt August 7, 2014.

Credit: Reuters/Ralph Orlowski

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BRUSSELS/FRANKFURT (Reuters) - If euro zone inflation falls deeper into the 'danger zone' as expected on Friday, it will at the very least complicate the European Central Bank's plans to wait and see whether its recent policy move to ignite the euro zone economy will work.

Inflation in the 18 countries using the euro is seen dropping to 0.3 percent in August, following a surprise dip to 0.4 percent in July, according to a Reuters poll of analysts. The data is due at 5 a.m. ET on Friday.

Together with updated projections from ECB staff, the data is likely to lead to a lively discussion at the ECB's Sept. 4 policy meeting about whether to accelerate existing policy measures because of the danger of deflation.

New action is unlikely though not impossible, according to ECB sources, who told Reuters the ECB is unlikely to act at next week's meeting unless the inflation figures show the euro zone sinking significantly toward deflation.

Inflation in the bloc's largest economy Germany on Thursday suggested the overall headline for the euro zone may not deliver a bigger than expected drop.

It was steady at 0.8 percent growth. Spain, the fourth largest economy, reported consumer prices fell 0.5 percent, lower than in July.

The ECB targets an inflation rate at below-but-close to 2 percent, a level not seen since the first quarter of 2013. It has been in what ECB President Mario Draghi has called "the danger zone" of below 1 percent since October last year.

Speaking in Jackson Hole last week, Draghi conceded that financial markets indicated "significant declines at all horizons" in inflation expectations, pledging to use "all the available instruments needed" to ensure price stability.

His comments fueled expectations that the central bank could soon follow the path of the U.S. Federal Reserve and others and start buying large quantities of private and sovereign debt in the market to boost inflation and growth, a process known as quantitative easing (QE).

A Reuters poll on Thursday suggested the bank will probably launch a QE program by March.

In his speech, Draghi also said fiscal policy could play a greater role alongside the ECB's monetary policy to support the recovery. While his comments were seen by some observers as a major shift away from a focus on austerity, others disagree.

"Mario Draghi did not call for a complete U-turn in the euro zone fiscal consolidation strategy, nor did he signal an imminent monetary stimulus on top of the measures announced in June," said Frederik Ducrozet, senior euro zone economist at Credit Agricole.

In June, the ECB cut interest rates to record lows, started charging banks to keep their funds overnight and launched a new long-term loan program, which will start in September and aims to give banks an incentive to lend more to the real economy.

Since then, the ECB has been in a wait-and-see mode, wanting to see the impact of its new liquidity injection first before considering further stimulus measures, though Draghi has stressed repeatedly the ECB stands ready to do more if needed.

(Reporting by Martin Santa in Brussels and Eva Taylor in Frankfurt Editing by Jeremy Gaunt)

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Comments (1)
kushalkumar wrote:
CONCLUSION :- ” Downward trend in world economy is likely to be in mild form during
November, 2014 to April, 2015, to grow somewhat intense during May, 2015
to October, 2015, becomes harsh during November, 2015 to July, 2016.
Such areas of life as minerals and metals, foodcrops, energy resources , defence and security of nations are likely to bear the brunt of these trends.
Collective wisdom in decision making, communication systems, aviation industry, and the cinema , music and TV industries are also , in addition, likely to be touched by these trends.
Countries or regions whose names begin with the letters B , E , EU, N, O, P, U or V may need to implement multilevel approach to challenges during this period”.

This is the substance or salient feature of my article – ” Stressful times ahead for world economy in 2015 and 2016″- published online on June 2, this year at Astrologyweekly.

Sep 01, 2014 2:25am EDT  --  Report as abuse
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