News Column

No risk of acute deflation, says ECB board member

June 29, 2014

AFP



Brussels: The European Central Bank (ECB) sees no acute danger of deflation but expects inflation to stay low for some time, executive board member Yves Mersch said in an interview on Sunday.



Barring unexpected developments, the European Central Bank, which holds its July meeting next week, may well keep rates at their record lows for the rest of the year, Mersch told German public radio.



Fears of deflation

Inflation is currently unusually low across the 18-nation eurozone, fuelling fears of deflation, a sustained drop in prices where businesses and households delay purchases, thus throttling demand and causing companies to lay off workers.



But Mersch said: "We see no heightened or acute danger of deflation at the moment in the sense that people would change their consumer behaviour and delay purchases because they expect prices to fall further."



Such a scenario "would create a negative spiral that would in turn hamper growth and further drive down prices," he told Deutschlandfunk radio, but added: "That's not something we're seeing at the moment."



While the central bank does not expect a drop in real prices, he said, "what we do see is an extended period of very low inflation.



"When we have such low inflation then there is a greater risk that we have no buffer if another unforeseen external shock hits the European economy."



At its June meeting, the ECB entered uncharted waters, taking one of its key rates into negative territory for the first time while also pre-announcing new liquidity measures.



It lowered its benchmark refinancing rate to 0.15 per cent and cut the deposit rate, which it pays commercial banks for depositing their unused cash, to minus 0.10 per cent.



Parking funds

This means that banks are charged for parking funds at the ECB, in the hope they might lend it on to businesses and consumers instead.



Mersch said that since the latest ECB rate cuts, short-term interest rates had moved down, and that "in this respect our measures have had the desired effect".



Asked whether European Central Bank  rates would likely stay low until 2016, he said: "If all other factors stay as they are today, then, according to the models, this could be the case.  



"But you know that reality is often far more complex. And our promise to keep interest rates low for that long only remains valid as long as no other factors influence price developments one way or the other."


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Source: Times of Oman