Ongoing Weakness and Risk of Deflation May Force Draghi to Act Shortly

by on April 10, 2014 7:54 am BST

The ongoing economic sluggishness and risk for deflation, European Central Bank (ECB) Mario Draghi is likely to act through monetary policy in the coming months. Economists speculate that multiple “tools” will be utilized that range from interest rate cuts to asset purchases.

The eurozone inflation, currently at .5 percent, is at its lowest point in four years. However, the ECB has not been able to effectively communicate a plan of action outside of the ubiquitous “do whatever it takes,” followed by further inaction. The central bank wants to avoid unleashing an all out asset purchase program, as seen in the United States and Japan; so, the market is likely to see more targeted incentives.”They’ll exhaust all the easier options they have before going to the bazooka of QE, and will see if they’re enough. And in the meantime, they’ll continue talking about QE,” said Frederik Ducrozet of Credit Agricole.

The euro’s exchange rate has been stubbornly high, floating between 1.37 and 1.39. The ECB could look to use measures to weaken the euro, which can cause an issue within the fragile economy at elevated levels. The euro is up over six percent against the greenback over the last year, and it is causing competitive issues with exporters. If the euro is take to 1.4000, the ECB would doubtingly have to act.