Monday 29 February 2016

ECB’s Villeroy Sees Deflation as Preeminent Danger for Euro Area

In World Economy News 29/02/2016

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European Central Bank Governing Council member Francois Villeroy de Galhau said deflation is the main danger facing the euro zone, underscoring policy makers’ growing concern about ebbing price pressure.
“If we look at Europe at the moment, the danger we face is without any doubt deflation not inflation,” Villeroy de Galhau said in the transcript of an interview with Frankfurter Allgemeine Sonntagszeitung provided by his office on Sunday.
The euro area’s inflation rate probably slipped back to zero this month, according to a Bloomberg survey, ending a brief run of price gains and adding urgency to the ECB’s review of its stimulus programs. The stagnation forecast by economists follows a 0.3 percent increase in consumer prices in January. The deterioration may not end this month, with ECB policy makers saying that lower oil costs mean that price drops are in the cards in the coming months. A first reading of February euro-area inflation will be published on Monday.

Inflation in the 19-nation area has fallen short of the ECB’s goal of just under 2 percent for almost three years, raising concerns that this will depress wages and undermine consumers’ willingness to spend. Against that backdrop, the Governing Council may cut its inflation forecasts at its meeting on March 10 and loosen monetary policy again.
It’s not just headline inflation that’s weakening. Core price growth, which excludes volatile food and energy, probably cooled to 0.9 percent in February from 1 percent in January, according to the Bloomberg survey.

“Oil prices and raw material prices are the driving factors for low inflation,” Villeroy de Galhau told the German newspaper. “But if the low energy prices have sustainable long-term effects, we have to act. That seems to be the case, but we will see in March.”
German Concern
Villeroy de Galhau, who gained his seat on the ECB council when he became governor of the Bank of France in November, used the interview to express sympathy with widespread concern in Germany about the ECB’s asset-purchase program, while explaining why the policy known as quantitative easing is needed.

“We do it because that is useful and not dangerous,” he said. “You should look at other central banks worldwide. All of them — Japan, the U.S., the U.K. — they all bought government bonds before the ECB. This is important because some people in Germany view QE as some European French-Italian fantasy. It is not.”
Twenty-one of the 47 economists in the Bloomberg survey forecast a euro-area rate below zero in February. Goldman Sachs sees a minus 0.1 percent figure and predicts it could go as low as minus 0.6 percent in the coming months.
To kickstart a revival in inflation, the ECB has already cut its deposit rate to minus 0.3 percent and is pumping 60 billion euros ($66 billion) a month into the economy via asset purchases.


Source: Bloomberg