7 Jan 2015
How will the ECB react to deflation? – Growth Aces
FXStreet (Barcelona) - The Growth Aces Team notes that ECB is expected to announce the full-blown quantitative easing on January 22, and will largely credit the -0.2%yoy inflation fall to falling crude prices and supply-side factors as the core inflation still remains positive.
Key Quotes
“Euro zone December headline inflation fell more than expected. HICP inflation amounted to -0.2% yoy in December , down from 0.3% yoy in November. The median forecast was at the level of -0.1% yoy.”
“The data show that deflation is the result of much cheaper energy. Energy prices fell by 6.3% yoy vs. a decline by -2.6% yoy in November.”
“The ECB is expected to announce the full-blown quantitative easing on January 22. However, the ECB may say that deflation is only the result of low crude prices and result mainly from supply-side factors and core inflation is still positive. The deflation based on a slump in oil prices may increase may increase the purchasing power of consumers.”
“The ECB may also say that low oil prices will reduce businesses’ costs and could be supportive for higher economic activity in the future.”
“Moreover, a strong depreciation of the EUR since last ECB meeting gives a strong boost to the exporters from the Euro zone. That is why, the decision on quantitative easing may be postponed. The ECB may choose to wait and see if the economic growth strengthens before deciding on sovereign QE.”
“On the other hand, the European Central Bank will have to counteract rising deflationary expectations. A more sustained period of deflation may destroy debt consolidation efforts of the Euro zone countries.”
Key Quotes
“Euro zone December headline inflation fell more than expected. HICP inflation amounted to -0.2% yoy in December , down from 0.3% yoy in November. The median forecast was at the level of -0.1% yoy.”
“The data show that deflation is the result of much cheaper energy. Energy prices fell by 6.3% yoy vs. a decline by -2.6% yoy in November.”
“The ECB is expected to announce the full-blown quantitative easing on January 22. However, the ECB may say that deflation is only the result of low crude prices and result mainly from supply-side factors and core inflation is still positive. The deflation based on a slump in oil prices may increase may increase the purchasing power of consumers.”
“The ECB may also say that low oil prices will reduce businesses’ costs and could be supportive for higher economic activity in the future.”
“Moreover, a strong depreciation of the EUR since last ECB meeting gives a strong boost to the exporters from the Euro zone. That is why, the decision on quantitative easing may be postponed. The ECB may choose to wait and see if the economic growth strengthens before deciding on sovereign QE.”
“On the other hand, the European Central Bank will have to counteract rising deflationary expectations. A more sustained period of deflation may destroy debt consolidation efforts of the Euro zone countries.”