Eurozone’s Consumer Price Index dipped to a 0.7% year on year pace this January, which was significantly below 0.9% that was expected.
Traders and economists are now looking towards the policy meeting to ensure the economy doesn’t slip in to deflation. The zone is looking more and more vulnerable with its current inflation being well below the target of 2%, the weakness in area really does bring renewed pressure for policy makers to act and bring stability to the economy.
The central banks own estimation is 1.1% for 2014, however many think this is optimistic. German inflation came in lower than expected and there is a feeling this could spread from the core of the Eurozone to other members.
Mario Draghi has hinted in the past that he has tools at his disposal and will use them as necessary to fight issues such as deflationary risk and rising unemployment in the block. He has signalled he may aid the economy by buying packages of bank loans to households and companies.
As the ECB does not issue debt and there is a reduction on net lending in the zone it is adding pressure. It is also possible that they could have use bank loans if packaged in an effective manner.
Even though Draghi and senior officials believe that the risk of deflation is very unlikely and say there is no urgent need for stimulus. However some economists have called for a cut in interest rates or taxation on deposits with the central bank.
If things were to disappoint there are rumours that they could be forced into buying government bonds and companies’ debt. This would be contentious and would split policy makers, particularly the officials at the Bundesbank.
Realistically a reduction in interests is unlikely, any lower, say a 15 basis point cut wouldn’t provide the stimulus that the economy needs. A better solution would be to pump liquidity into the market by LTROs, therefore getting credit rolling amongst banks and businesses to enable an economic revival to occur.