-Lena Komileva, managing director of G+ Economics
Inflation at a four-year low, almost record-high unemployment, strong Euro and sluggish growth– it seems that it is not enough for Mario Draghi to add fresh stimulus in the struggling economy. During the last several weeks economists were making their bets on which tool the ECB will use to push the single currency lower and stimulate the economy.
The outcome was disappointing, as the European Central Bank decided to keep its refinancing rate at 0.25%, the marginal facility rate at 0.75%, while the deposit rate was kept at 0%. The first two were revised last time on November 13, after inflation plunged to 0.7%, while the depo rate stayed unrevised since July 11, 2012. Policymakers refrained from pulling the trigger amid conflicting signals that show the 18-nation bloc is still gradually improving. Amid growing deflation risks, European consumers and companies put off purchases in hopes for an even cheaper prices. Such a downward spiral becomes a drag on economic growth and it can be extremely difficult to get out of it– as Japan was stuck in deflation for more than 15 years. One factor behind persistently low inflation is a strong currency. During the last six months the Euro gained over 2% versus the greenback. The M3 money supply growth is significantly below the ECB's target of 45%, averaging around 1.2%, suggesting the inflation offers a murky picture.
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