After months underplaying the risks of deflation, it looks like the European Central Bank (ECB) is now finally resigned to it.
Chief economist Peter Praet admitted in an interview released this morning that inflation figures will spend a large part of 2015 in negative territory, and offered some of the biggest hints so far on what Europe’s QE programme is going to look like.
Spain’s inflation figures, released yesterday, show the major effect that tumbling oil prices are likely to have. Prices dropped 1.1% in the year to December, the fastest drop in five years, and far faster than analysts expected.
Eurozone inflation was last at 2% at the beginning of 2013, and has been steadily dropping ever since. It’s been below 1% for all of 2014, and a dip into deflation is now all but guaranteed in the new year. Here’s that plunge:
Deflation can cause a host of economic problems, especially for countries where the governments are heavily indebted and don’t control their own currencies.
Praet’s comments are some of the most dovish come from the ECB, making it sound all but guaranteed that the central bank will start a quantitative easing programme in January. He’s also given a hint towards the makeup of the likely QE programme, saying that government bonds are “the only type of bond in which there is a significant market volume”.
Unlike Germany’s Bundesbank chief Jens Weidmann, who has argued that the ECB should effectively ignore falling oil prices, Praet says that with expectations for future inflation now “extremely fragile”, the ECB must act to bring inflation upwards.
Wolfgang Schaeuble, Germany’s finance minister, has also hit out at suggestions that Europe needs QE. The new programme could widen a major rift in Europe, with some of the bloc’s healthier economies staunchly opposed to easier policy for the others.
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