ECB Ready To Fight Deflation

The European Central Bank is ready to intervene if inflation remains low for too long, President Mario Draghi said on Monday, adding that he was certain the euro zone will escape the fate of Japan.

Draghi kept his cards close to his chest, however, and declined to discuss in detail the instruments it could use to counter any prolonged weakness in prices.

But he pointed out that the reason banks were not lending to households and companies was not because they lacked funding, suggesting more long-term ECB loans are unlikely for now.

Euro zone inflation has fallen far below the ECB’s target of below but close to 2 percent in recent months as the bloc crawls out of recession and banks try to clear their balance sheets of assets that turned sour during the crisis.

The situation reminds some observers of Japan in the 1990s after the burst of a real estate bubble pushed the country into a deflationary cycle from which it has still not fully recovered.

“We are fully aware of the downward risks that a protracted period of low inflation entails,” Draghi told the European parliament. “The Governing Council is ready and able to act if needed.”

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza