EU bank un­der pres­sure as pan­demic drives de­fla­tion

The Daily Telegraph - Business - - Business - By Rus­sell Lynch

THE Covid-19 cri­sis tipped Europe into the de­fla­tion quag­mire for the first time in four years in Au­gust, heap­ing pres­sure on cen­tral bankers to fire more am­mu­ni­tion at the pan­demic.

The euro­zone’s in­fla­tion rate sank from 0.4pc in July to -0.2pc, the low­est since May 2016 and even fur­ther be­low the Euro­pean Cen­tral Bank’s tar­get of “close to 2pc”.

The fall, driven by fac­tors such as a VAT cut in Ger­many, comes de­spite the ECB ex­pand­ing its pan­demic stim­u­lus to €1.35bn in June as well as neg­a­tive in­ter­est rates and flood­ing the bank­ing sys­tem with cheap loans.

More wor­ry­ingly for pol­i­cy­mak­ers at­tempt­ing to avoid a Ja­pan-style de­fla­tion­ary trap, less volatile “core” in­fla­tion – strip­ping out volatile food and en­ergy prices – sank to 0.4pc, the low­est in the 21-year his­tory of the euro. De­spite signs of ris­ing ac­tiv­ity as Europe emerges from the im­pact of lock­downs, the bad news on in­fla­tion comes ahead of the cen­tral bank’s lat­est pol­icy meet­ing next week. HSBC economist Fabio Bal­boni said “the ECB might feel the pres­sure to de­liver fur­ther stim­u­lus sooner rather than later”.

Flo­rian Hense, Euro­pean economist at Beren­berg, said: “The ECB can stress it has de­liv­ered an un­prece­dented stim­u­lus amid the pan­demic and that part of its poli­cies work with a lag. Still, that may not be enough. If in­fla­tion re­mains very low, the ECB may de­cide in De­cem­ber to ex­tend its cri­sis-response as­set pur­chase pro­gramme.”

The ECB is re­view­ing its man­date un­der Chris­tine La­garde. Its fail­ure to hit its tar­get prompted spec­u­la­tion it could fol­low the US Fed­eral Re­serve and move to an av­er­age in­fla­tion tar­get­ing regime.

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