Monday, February 29, 2016

European Central Bank Woes

Prices in the euro zone fell in February, falling short of already depressed expectations and virtually ensuring another round of policy easing from the European Central Bank on March 10.

Combined with weak sentiment and output data, the dismal inflation figures suggest that the bloc's tepid growth is slowing, adding to calls for fiscal and monetary policy action to prop up an economy that has yet to grow back to its pre-crisis size.

"Deflation would be a disaster for the euro area as the burden of high debt would increase," Nordea economist Holger Sandte said. "Therefore, the ECB will continue easing monetary policy significantly."

"But no matter what the ECB decides to do on 10 March, inflation is likely to hover around zero during the next few months before it picks up – if oil prices behave well," Sandte added.

Headline inflation, the key indicator watched by the ECB, fell to -0.2 percent from 0.3 percent a month earlier, far from the bank's target of close to 2 percent and below already muted expectations for unchanged prices.

More alarmingly for the ECB, core inflation excluding volatile food and energy prices, dipped to 0.8 percent from 1 percent, suggesting that low oil prices are feeding into the price of other goods and services, creating a so-called second round effect that could entrench low inflation and lead to deflation.

Indeed, Bank of France Governor Francois Villeroy de Galhau, an influential member of the ECB's Governing Council, warned over the weekend that the central bank would have to act if the low energy prices appeared to have long-term effects.

No comments: