Draghi Under Pressure As Euro Area Price Cuts Intensify

  • Manufacturing, services price cuts highlight inflation concern
  • Purchasing managers index falls to 4-month low in January

The euro area’s manufacturing and services industries cut prices at the fastest pace in almost a year in January, underlining concerns about weak inflation in the region.

Markit Economics said its composite purchasing managers index for January was “disappointing” and raises the prospect that the European Central Bank will once again pump up its stimulus program. The PMI declined to 53.6 — a four-month low — from 54.3 in December, and the measure of output prices dropped to the lowest since March.

“Most worrying of all from a policy maker’s perspective is the intensification of deflationary pressures,” said Chris Williamson, chief economist at Markit in London. “This raises the question of whether existing stimulus has simply been insufficient, or whether monetary policy is proving ineffective.”

ECB President Mario Draghi has said the Governing Council will review its stimulus in March amid signs that falling oil prices will push the euro region’s inflation rate back to zero. The Bank of Japan has already responded to the deteriorating outlook with negative interest rates and investors see a slower pace of tightening by the Federal Reserve.

In the euro area, Markit said the PMI had some “mildly positive signs,” with rising levels of employment and backlogs of work. The headline composite number was also marginally better than the initial estimate, and it remains above the key 50 level that divides expansion from contraction.

The services index slipped to 53.6 from 54.2, matching the preliminary reading.

The composite report continued to point to divergences in the 19-nation economy, with Spain and Germany leading growth. France offered a disappointing reading, with the index at just 50.2, lower than the 50.5 initial estimate. Growth in Italy also slowed.

Bloomberg

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell
Dean Popplewell

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