Vanishing euro zone inflation seen intensifying ECB policy headache
If euro zone inflation falls deeper into the ‘danger zone’ as expected on Friday, it will at the very least complicate the European Central Bank’s plans to wait and see whether its recent policy move to ignite the euro zone economy will work.
Inflation in the 18 countries using the euro is seen dropping to 0.3% in August, following a surprise dip to 0.4% in July, according to a Reuters poll of analysts. The data is due at 5 a.m. ET on Friday.
Speaking in Jackson Hole last week, Draghi conceded that financial markets indicated “significant declines at all horizons” in inflation expectations, pledging to use “all the available instruments needed” to ensure price stability.
In his speech, Draghi also said fiscal policy could play a greater role alongside the ECB’s monetary policy to support the recovery. While his comments were seen by some observers as a major shift away from a focus on austerity, others disagree.
In June, the ECB cut interest rates to record lows, started charging banks to keep their funds overnight and launched a new long-term loan program, which will start in September and aims to give banks an incentive to lend more to the real economy.
Since then, the ECB has been in a wait-and-see mode, wanting to see the impact of its new liquidity injection first before considering further stimulus measures, though Draghi has stressed repeatedly the ECB stands ready to do more if needed.
Source: Reuters
