According to Francois Villeroy de Galhau, Member of the European Central Bank’s Governing Council, the Euro Zone’s clear and present danger is deflation.
Deflation a big challenge
Speaking in an interview on the weekend, Villeroy is quoted as saying that the big danger looming over Europe at the moment is ‘without any doubt’ not inflation, but deflation. A recent economist survey had shown that inflation rate stagnated in February with actual numbers ending up worse than predicted. While falling raw material and oil prices were major drivers of low inflation, Villeroy cautioned that action may be needed in case the lower energy prices have ‘sustainable long-term effects’, something that would become clearer by March.
The ECB had targeted inflation of close to 2 percent for the euro zone, but the actual numbers have fallen short over and over. In such an environment, concerns are rife that consumer spending too will slow further as wages decline.
Dips in consumer prices across Euro Zone, disinflation pressure mounts
Consumer prices for February were lower than median estimates in several countries. Spain saw consumer prices see the biggest decline in a five month period, leaving the drop worse than anticipated. France which was expected to see a 0.1 percent rise instead experienced an annual 0.1 percent fall. Germany too saw a drop of 0.2 percent against the prediction of status quo.
Villeroy addresses German concerns
Villeroy became a part of the powerful ECB council in November after he was named Governor, Bank of France. The matter of German skepticism and worry on the ECB asset purchase program was addressed in the same interview, where he said that such quantitative easing was not dangerous. He cited the examples of central banks in countries like the U.S., U.K. and Japan purchasing government bonds as a precedent while assuring the German people that it was far from being a ‘European French-Italian fantasy’. The ECB is already pouring EUR 60 billion into the region’s economy through the purchase of assets, and has also lopped its deposit rates.
Inflation rate dip expected
From data in a Bloomberg survey it seems likely that the area’s inflation rate has gone back to zero. Of the 47 economists who shared their views in a Bloomberg survey, 21 felt that inflation would fall to levels below zero in February. This, after a period that saw some amount of price gain in January. Policymakers warn that falling oil prices might mean further drops in prices in the months ahead. The readings of the inflation in the region in February is heavily anticipated, and could lead to loosening of monetary policy for the 19 nation region.