Deflation is coming to Europe

European Central Bank President Mario Draghi on Thursday gave his first press conference since the summer break and he was seriously downbeat on Europe.

As well as cutting growth forecasts for Europe and warning about big risks from emerging markets, Draghi warned that Europe could fall into deflation in the coming months.

He said: “We may see negative numbers of inflation in the coming months, but this will be a transitory phenomena due to low oil prices.”

Inflation at the moment is running around 0.2%, way below the 2% the ECB is targeting. The forecast for inflation this year was cut from 0.3% to just 0.1%. Europe’s GDP growth forecast was also cut from 1.9% to 1.7%.

Things have got worse in recent weeks because of the chaos in China and volatility in stock markets. Investors have been piling into the “safe haven” euro. The knock on effect of a strong euro is exports are more expensive, meaning there’s less money coming into countries.

With less money to go around, price rises are slowing — and could even slip to deflation. As a result, analysts thought Draghi could extend or ramp up the programme of quantitative easing in Europe, first introduced 6 months ago.

He certainly signalled his willingness to do so, but really his tactic seems to be killing the euro with his words. All the dovish comments are currently hammering the euro.

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