Blow of disinflation winds intensifies

Source: Dukascopy Bank SA
The streak of negative news from the Euro zone seems never ending. Last week the European statistics agency Eurostat confirmed that the inflation rate in the Euro zone slipped in September to the lowest level since October 2009 amid sinking energy prices. Annual consumer inflation in the 18-member union sharing the Euro was 0.3% in September falling down from August's 0.4% reading. Inflation has now been in the ECB's "danger zone" of below 1% for 12 straight months. In addition to that, German investment morale deteriorated further in October, with the ZEW's index of investor and analyst expectations plunging to minus 3.6 in October from 6.9 in September. That is the 10th month of drops and the first negative reading since November 2012. Amid bleak economic activity in the Euro zone's powerhouse, the German Finance Ministry cut its growth outlook to 1.2% from 1.8% for 2014, and its forecast for 2015 to 1.3% from 2%. Subdued German sentiment and a recent streak of weak fundamentals coupled with low inflation expectations, raises the likelihood of the European Central Bank turning to printing money to purchase government bonds, known as quantitative easing.  Meanwhile, in the ranks of the governing council there are those who do not support Mario Draghi's intentions. European officials continue to argue over how much more stimulus the European Central Bank should provide to the Euro zone's economy. President Mario Draghi reiterated his pledge to expand the central bank's balance sheet by as much as 1 trillion euros to combat deflationary threat. However, Bundesbank head Jens Weidmann replied by saying that a target value is still a subject for discussion. This deepening conflict between two central bankers resulted in an exclusion of Weidmann from decision making process in a time when crucial decisions are about to be made.
With continental Europe and Japan being on the verge of another recession and China's economy is also slowing, the Fed officials are concerned about the impact a slowdown in elsewhere in the world may have on the US economy, and warned that it could force them to delay the interest rate hike. Global economic outlook will not only determine timing of the first rate hike in the US, but will also shape the BoE's monetary policy decisions. The central bank predicted that the UK's robust economic growth will fade slightly towards the end of 2014, and would continue to focus on domestic inflationary pressures. Britain's inflation rate fell further in September as declining oil prices and a stronger local currency lowered imports costs, reinforcing the view the Bank of England will maintain interest rates at 320-year low for now.

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