(Repeat for additional subscribers)
April 3 (The following statement was released by the rating agency)
Recent comments suggesting that quantitative easing (QE) is becoming a less contentious
policy option in the eurozone reduces the risk of deflation in the region, Fitch Ratings says.
European Central Bank Governing Council member and Bundesbank president Jens
Weidmann said last week that the ECB might consider buying "private or public
assets" and that "we are currently discussing the effectiveness of these
measures" as well as possible costs and side-effects. Opposition from the
Bundesbank has long been seen as a potential obstacle to the ECB following the
lead of other global central banks and embarking on QE.
There is no guarantee that discussing QE will result in the launch of a
programme. Nor is there a guarantee that QE would be sufficient in itself to
ward off the spectre of deflation. Nevertheless, considering QE indicates that
the ECB is prepared to add to its unconventional policy tools to tackle the risk
of deflation, if necessary.
We do not currently predict prolonged, self-sustaining deflation in any of the
world's major advanced economies (MAEs), including the eurozone, where we think
economic recovery, coupled with private deleveraging and improved private
funding conditions, will see the region avoid long-lasting deflation, such as
that experienced by Japan from the 1990s. However, the success of "Abenomics" in
breaking Japan out of deflation is still far from assured, illustrating how
pernicious deflation can become once entrenched.
We do think that the risk of deflation is higher in the eurozone than in other
MAEs over the next two years. This is partly because eurozone inflation is
already low and falling. Eurostat said Monday that seasonally-adjusted eurozone
consumer price inflation dropped to 0.5% in March from 0.7% in February and well
below the ECB's target of close to, but not at, 2%. This gives little buffer
against any further negative shocks.
We also see deflation as a greater risk in the eurozone because of the more
limited policy response readily available to the ECB, which is near the zero
lower bound for nominal interest rates. It is unlikely that experimenting with
mildly negative deposit rates would be transmitted into a meaningful stimulus to
the real economy (see Global Economic Outlook published on 14 March).
It is far from clear what form any eventual QE programme would take, and it
would still face potential political and legal challenges given the prohibition
on monetary financing under the Treaty of the European Union. The pool of
private sector bonds that could be bought is smaller than in, say, the US. And
with core sovereign yields low and spreads between core and periphery yields
compressing, the impact of government bond purchases may be limited.
However, if Weidmann's comments do signal a more open stance to QE, it would
reinforce our view that eurozone authorities and policy-makers are alive to the
continuing risks to the bloc's long-term recovery and adjustment. These include
deflation or an extended period of low inflation across the eurozone, which
would put pressure on debt dynamics in highly indebted countries, and would also
make the continuing competitiveness adjustment by the periphery relative to the
core more difficult.