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Pressure continues to build on the ECB to act. As discussed earlier (see post), the central bank may remain on the sidelines for some time, but the latest developments (listed below) make this inaction increasingly difficult.
1. Declining Liquidity: The area banks’ excess reserves are now at the lows not seen in years.
2. French inflation numbers that came out today continue to show price increases that are materially below the central bank’s target (see chart). Disinflationary risks remain.
3. The euro is grinding higher, which is not great for the area’s exporters and will put further downward pressure on prices.
|EUR/USD (source: MarketWatch)|
4. China’s slowdown will have a material impact on the area’s economy as well because China is the Eurozone’s third largest export market outside of the EU. The fact that China’s imports unexpectedly fell by 11% is not great news for the euro area’s recovery.
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