Inflation is too low in the Eurozone

It’s not clear what the European Central Bank can do about the problem. Mario Draghi and his colleagues are faced with a stubborn inflation which remains stuck at 0.8%, well below the central bank’s 2% target for the currency zone…

 


Powered by Guardian.co.ukThis article titled “Inflation is too low in Europe” was written by Phillip Inman, for The Guardian on Wednesday 5th March 2014 22.48 UTC

Mario Draghi is faced with a dilemma. All the signals from the eurozone show a gentle recovery is gaining momentum. Tills are ringing from Madrid to Berlin, while manufacturing in Portugal is beginning to show signs of life. Yet inflation is stuck at 0.8%, well below the 2% target for the currency zone.

The European Central Bank chief is under pressure to follow the Fed and the Bank of England by turning on the cheap money taps. Only a dose of quantitative easing (QE) will boost demand.

Draghi hinted strongly last month that low growth and low inflation reflected a form of economic stagnation he wanted to avoid. Action was necessary, maybe this month. He said: “Right now we have a level of inflation which is way below 2% … We know that the longer it stays at the current level, the higher will be the risk that it will not go back to 2% in any reasonable time and we don’t want that.”

Most likely he will ease the situation a little. Will there be a rate cut ? Probably not. And QE is out of the question. Maybe a little behind-the-scenes fiddling with ECB bond purchases to cut lenders’ costs.

It’s a nice problem to have, though. A better economic scenario would also avert a row brewing with the Germans over his OMT lifeboat scheme for bankrupt eurozone members. Portugal will exit its rescue scheme in May, and Greece seems solidly ring-fenced. Still, it’s not clear how Draghi can, by himself, create enough demand to push up inflation.

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