ECB rejects worries of deflation in eurozone
Print Edition
THE European Central Bank yesterday dismissed fears that consumer prices might fall in the 18-nation eurozone, a situation that would drag down the economy. It stressed, however, that it is ready to act in new ways if needed.
Another drop in the inflation rate in March, to 0.5 percent, raised concerns the eurozone might slip into deflation, when consumers put off purchases in hopes of bargains later and companies cut prices to entice buyers. Such a downward spiral can snuff out economic growth for years.
After the ECB decided to leave its main interest rate at a record-low 0.25 percent and not provide any further stimulus, President Mario Draghi noted the inflation figures are consistent with the bank’s forecasts of a “prolonged period of low inflation.”
But to show it is not complacent about the danger, the ECB beefed up its rhetoric.
Draghi said the ECB’s governing council is “unanimous” in its determination to maintain a highly accommodative monetary policy stance and is ready to use “also unconventional measures ... to cope with the risk of a too prolonged period of inflation.”
Such measures could include a new round of cheap loans to banks or large-scale purchases of financial assets, as the US Federal Reserve has done. That would increase the amount of money in the economy and aim to lower market interest rates and stoke inflation. But such a move faces legal, political and technical obstacles.
The ECB could also trim its deposit rate below zero, effectively penalizing banks for holding money at the ECB instead of lending it out in the economy.
Draghi said the recent inflation data mean the ECB must be vigilant, but that it sticks to its forecast that the eurozone will not see deflation.
“We don’t see the risk of deflation as having increased,” Draghi said.
He noted the unexpectedly low inflation data for March was also influenced by seasonal factors, meaning the rate may well rise next month.
For the ECB to act on the data, “we need more info whether there has been a change in the medium-term outlook,” he said.
In Europe, the inflation rate is the main driver of monetary policy decisions, unlike in the US where the Fed also takes jobless figures into account.
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