Deflation Risk in Euro Zone

According to EU’s statistics office, Eurostat, the inflation in Euro zone has reached 0.5 percent in March, the lowest level since November 2009. The European Central Bank is expected to intervene to minimize the deflation threat in the bloc, as the current annual consumer inflation marks the region’s economic vulnerability and weakness.

Not in line

For the past six months, inflation has been outside the safe zone, less than 1 percent, while ECB’s target is to keep it somewhere just below 2 percent. Most of the troubles seem to be arising from some euro zone members like Greece, Cyprus or Ireland, where in the past months prices dropped. Bolder solutions are being proposed by powerful economies, like the head of German central bank, who put in discussion a bond-buying programme, expected to pump more funds in the European economy.

In consequence, there are three hypothesis regarding ECB’s reaction.

ECB actions

The first one is that ECB will cut interest rates on Thursday. Also, other complementary measures are speculated to be implemented too, such as applying negative deposit rate of bond buying. The second hypothesis is that ECB will take advantage of the soon to come Easter, which is expected to rise travel and hospitality sector prices in Europe and, therefore, to positively impact on the inflation growth. That would allow the ECB to postpone its intervention for June.

The third is raised by optimistic voices who sustain that inflation has reached the bottom and there is room only for some growth, with no further intervention needed. Commerzbank’s economist Christoph Weil expect consumer prices to get up to 0.9 percent in April, due to stabilizing food and energy prices and Easter holyday. ECB President Mario Draghi stated that the bank is prepared to intervene in multiples steps against eventual deflation and directly correlated the how long the inflation stays low with the increased risk or deflation.