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Draghi's Deflationary Dilemma

Monday March 31st 2014

/images/uploads/SPL ECB Draghi's Deflationary Dilemma 31-03-14.pdf


President Draghi…You have run out of time for further delay.

The preliminary estimates of Eurozone CPI in March have been booked at 0.5%, lower than our forecast of 0.6%. This reading is the lowest level in over four years.

Given the CPI rate in the Eurozone has been under +1.0% (half the official target), for six months the pressure for action on Thursday as against mere words about the medium-term has arrived.

The forecast for this year and next are woefully shy of 2.0% and yet all the signs are that come Thursday, we will be treated to another meeting where nothing will be done. It would be a surprise if the ECB acted out of the blue; however, that is exactly what they should do.

If we reflect back to March 25th, the ECB President stated that he was ready to act…

“…take additional monetary policy measures if any downside risk appear to its forecast for a gradual closing of the output gap in the coming years. …”

The 2.1% decline in energy prices will continue as we go into Spring and Summer we can expect more downward pressure so the top line figure will make no gain as  poor weather that has affected harvests will keep food prices on an upside trajectory.

We are sure the ECB will point to the recent suggestions that the Eurozone’s recovery is gaining momentum; however, the path of the Euro on the global FX markets may well derail the Non-Eurozone export recovery in all bar Germany.  That will continue to cause inertia in attempts to reduce unemployment which in turn harms deficit reductions and GDP growth.

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