EU bank under pressure as pandemic drives deflation
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.