"Speculation about an asset-purchase program from the ECB is likely to gain further traction"
- Benjamin Schroeder, an interest-rates strategist at Commerzbank AG
This week European Central Bank's patience will be tested once again, as key inflation data for July are on the radar. While policy makers may feel there is a room for complacency at least for this summer that would be a terrible error, as Eurozone crisis is just sleeping and it is far away from being dead. Despite some enthusiasm, economic risks are on the rise, and the recent problems of Portuguese bank Espiritu Santo is another prove of that.
Falling funding costs diminish incentives for reducing debts and implementing structural reforms. In order to increase spending and ease fiscal policy the Italian government proposed to use the benefit of lower rates, expecting around 10 billion euros over the next three years. Additionally, a weaker single currency cannot boost exports as a high proportion of trade is conducted within the Eurozone itself. Based on the U.S., Japan and U.K. experience the monetary policy cannot boost inflation significantly, reflecting the impact of deleveraging by companies, consumers and banks. While rising import costs can provide a boost to the headline inflation, the erosions of real income will likely reduce private consumption, limiting any pick--up in GDP growth. This week a report from the Eurostat is expected to show the inflation rate remained unchanged at 0.5% for a third month in July, while unemployment rate is expected to stay at 11.6% in June.
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