"So the question of the day can be couched into what can the ECB do to make policy more accommodative"
- Bob Savage of Track Research
Europe is facing a threat of deflation, which policymakers are unlikely to be willing to fight. This is first thing that may come to analysts' mind after Thursday's disappointing inflation data that showed CPI reached the lowest since November 2009. Persistently weak inflation that may turn into deflation, is particularly bad news for the 17-nation bloc, whose largest burden is too much debt. Higher inflationary pressure eats away the real value of debt, making it easier to pay, while negative price growth does the opposite. Weak inflation data puts more pressure on the central bank, which is having a monetary policy meeting later this week, and it seems, they have to do something radical, even though Draghi has limited options. Together with persistently low inflation, the 17-nation economy is facing record high unemployment and shrinking bank lending. One of the most obvious options for the ECB is to make another adjustment to the key interest rate, which is currently at a record low of 0.5%, to add more liquidity to the financial sector. With inflation outlook at 1.3% for 2014, the ECB has not yet signalled it is enough to cut rate further. Neither the central bank hinted its commitment to halt a rising Euro. As to the quantitative easing, the ECB relies on bank lending for almost 70% of credit, making its more difficult to use asset purchases. Draghi, however, may simply wait for the nascent recovery that would lead to a pick up in price gains, while according to Christoph Weil, an analyst at Commerzbank AG, low inflation may even help Eurozone's amelioration.
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