ECB Watches Low-Inflation Ahead of June 5 Meeting

by on May 26, 2014 11:32 am BST

European Central Bank President Mario Draghi has recently changed his tone on lower inflation, previous brushing it off in hopes that consumer price drag was only temporary. However, he has guided markets to the possibility that the central bank will take additional steps to address the low-inflation during their early-June meeting.

Draghi is choosing his words carefully, guiding the euro lower as it flirted with 1.4000 against the US dollar. Specific actions have not been foretold, but measures from rate cuts and liquidity injections have been muttered with asset purchases being a last-resort option.

What we need to be particularly watchful for at the moment is, in my view, the potential for a negative spiral to take hold between between low inflation, falling inflation expectations and credit, in particular in stressed countries,” said Draghi in Sintra Portugal today. He reaffirmed that the goal would be to turn inflation towards the central bank’s target of two percent.

Economists are forecasting both a cut in the benchmark from all-time lows of .25 percent, as well as a cut in deposit rates that stand at zero. Many believe that a benchmark rate cut alone will not significantly help matter, while a cut in the deposit rate will aim to encourage lending, which has been anemic, to say the least.

Asset purchases still remain a likelihood but only if the eurozone’s economic condition continues to deteriorate. Draghi has said that it is highly unlikely that the central bank will embark on the kind of quantitative easing conducted by the Federal Reserve and Bank of Japan (BoJ).