Eurozone deflation fears add to pressure on Draghi

Eurozone inflation fell unexpectedly to 0.5 per cent last month, intensifying pressure on Mario Draghi, president of the European Central Bank, to act against the rising threat of deflation.

The inflation reading is well below the ECB’s target of just under 2 per cent and on a par with March, when it hit its lowest level since autumn 2009.


The likelihood of looser monetary policy, including a radical move to cut one of the central bank’s key rates below zero, has significantly increased ahead of Thursday’s ECB vote. Mr Draghi is also expected to announce proposals to help credit-starved small businesses.

Hervé Amourda, economist at Société Générale, said the inflation reading “strengthens our call for bolder action from the ECB”.

The mood in Frankfurt contrasts with the debate in the UK, where the Bank of England has started to discuss raising rates after signs the British recovery has gained traction.


The eurozone economy barely grew in the first quarter and the latest disappointment on inflation will stoke concerns, expressed last week by Mr Draghi, of a negative spiral of subdued price pressures and tight credit conditions.

Such a sequence of events could derail the region’s fledgling recovery by destroying demand and raising debt burdens in the bloc’s periphery.

Much lower-than-forecast German inflation in May has already toughened the challenge faced by weaker member states, which are attempting to match the levels of competitiveness seen in the bloc’s economic powerhouse in part through divergences in inflation rates.

Large-scale asset purchases, known as quantitative easing, are not expected this month. But with the ECB set to exhaust all of its conventional tools to fight deflation, analysts are asking whether Mr Draghi will signal that the central bank is prepared to go further.

Ken Wattret, economist at BNP Paribas, said there was a high chance of Mr Draghi strengthening his rhetoric on Thursday afternoon: “Even if the ECB is reluctant to deliver QE at this point, persistent downward surprises on inflation make a strong case for its communication to take a clear step towards it.”


Fonte: FT