The Euro area inflation indicators are pushing into dangerous territory. The core CPI measure in particular is trending sharply lower. The ECB has so far been taking a “wait and see” attitude, though some on the Governing Council are apparently getting concerned.
Chicago Tribune: – Core inflation, which strips out volatile costs like food and energy, hit a record low of 0.7 percent.
The readout will heighten concerns at the ECB about entrenched price weakness taking hold, though strong company activity towards the of last year will give them some comfort.
“Obviously they are worried, but it’s not significantly lower than it was a month earlier,” Anders Svendsen at Nordea said. “I don’t think it’s enough to prompt a new rate cut but I do think it’s enough to keep them dovish and ready to act.”
Of course it’s no longer about lowering the overnight rate. Given the persistent credit contraction in the euro area (see post), there is pressure on the ECB to add liquidity to the banking system by potentially providing another round of LTRO financing. The current LTRO balances are nearly half what they were after the last 3-year financing program was offered in 2012.
|€ million (source: ECB)|
But many analysts believe the ECB will be on hold for some time because of seeming economic improvements in the Eurozone periphery (see chart below) as well as stronger data out of the US.
There is some concern, paticularly in Germany that if the ECB’s policies diverge from the Fed’s, the euro could weaken significantly – potentially causing prices to rise more than desired. Germany’s traditional fear of inflation and unease with unconventional tools seem to have permeated the ECB’s thinking (particularly now with Ilmars Rimsevics joining the Governing Council). Doing nothing however is a risky policy because ultra-low inflation and weak credit conditions are a recipe for Japan-style deflationary trap (see story).
Wall Street Examiner Disclosure: Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. No endorsement of such content is either expressed or implied by posting the content. All items published here are matters of information and opinion, and are neither intended as, nor should you construe it as, individual investment advice. Do your own due diligence when considering the offerings of information providers, or considering any investment.