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ECB struggles with deflation dilemma

Thursday, Feb 06, 2014 - 02:08

Feb 06 - No change from the European Central Bank, but policymakers face a dilemma after a surprise fall in inflation brought the euro zone closer to slipping into deflation. David Pollard reports on the Bank's decision.

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The euro zone's had its share of ups and downs, not least of all the debt crisis and failing economies. And now the threat of deflation. Against the target rate the ECB sees as optimum for a healthy economy, prices only nudged up a fraction in January. Good news for the consumer, bad news for the ECB. Mario Draghi says it won't happen. SOUNDBITE (English) MARIO DRAGHI, PRESIDENT, EUROPEAN CENTRAL BANK, SAYING: ''First of all we have to dispense once more with the question 'Is there a deflation?'. And the answer is no. There is certainly going to be a subdued inflation, a low inflation for an extended, protracted period of time, but no deflation''. The ECB president has vowed to keep rates at rock bottom while the euro zone revives. He acknowledged turmoil in emerging markets could put more pressure on prices - and on the case for action. Even if the time isn't quite right for a change of policy now. SOUNDBITE (English) MARIO DRAGHI, PRESIDENT, EUROPEAN CENTRAL BANK, SAYING: ''The reason for today's decision not to act has really to do with the complexity of the situation I've just described - and the need to acquire more information'' With the main ECB interest rate at a record low already, it has little ammo left. One option could be to make commercial banks pay for leaving deposits with the ECB - effectively earning them a negative interest rate in a move to force them to lend. Alan Higgins of Coutts. SOUNDBITE (English) ALAN HIGGINS, CHIEF INVESTMENT OFFICER, UK, COUTTS, SAYING: ''There's some small talk about doing something in terms of securitisation of business loans, but for us that looks far fetched. I think it's going to be tough to implement that properly. So it does come back to rates. And although rates are at all times lows, there is that, if they get really concerned, they will look at this negative deposit rate once again.'' The ECB is pencilling in 1.2 per cent inflation this year. Draghi has called anything below one per cent a ''danger zone''. New ECB forecasts are due before its meeting next month. A major inflation downgrade could make it the most critical meeting for a long time.

ECB struggles with deflation dilemma

Thursday, Feb 06, 2014 - 02:08

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