Europe Narrowly Averts Deflation
Alvexo | Aug 31, 2015 10:28AM ET
With the dust finally settling after last week’s rollercoaster ride across global financial instruments, attention is diverted back from sentiment to hard data. Today’s session has been quiet amid the UK banking holiday with few announcements of value. However, the all-important inflationary conditions discussed by central bankers over the weekend in Jackson Hole should be viewed as a very pertinent development to review. The participating members were largely of the opinion that the recent disinflation facing both advanced and developing economies was merely temporary and not likely to affect the long-term prospect of consumer and producer prices from returning towards targeted levels. While most participants were carefully watching the language of Federal Reserve Vice Chairman Fischer to glean any hints about the path of US interest rates, some interesting comments were delivered by the ECB’s Vice President Vitor Constancio. During his comments, Constancio made it clear he was extremely confident that the Central Bank could stoke inflation, which has barely budged since the introduction of the asset purchase program.
The latest preliminary CPI numbers from the Euro Area show that region has managed to avoid a deflationary spiral as the European Central Bank’s asset purchase program helps ease lending conditions. However, despite the existing program, downside risks remain according to other ECB policymakers and the possibility of deflation has not been ruled out. This is paving the way for another expansion of quantitative easing during this week’s ECB decision. Due to the limitations of the current program owing to the finite amount of government bonds available for monetization coupled with the rising euro, it will be an imperative of the Central Bank to expand the assets included in the existing purchasing program. While it remains clear that most of the policy is aimed towards keeping the euro exchange rate mechanisms competitive with other global economies it is evident that the ECB has failed to learn the lessons of both the Federal Reserve and Bank of Japan. Despite all the money that was allocated toward monetary stimulus, it has had limited impact encouraging inflation. Someone should remind ECB policymakers before it is too late.
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