The European Central Bank left interest rates at a record low at 0.25% on Thursday, but said it remained ready to act in the face of risks to the Euro zone economy, particularly turbulence in the emerging markets, and downplayed deflation.
ECB President Mario Dragui, speaking after the latest Bank policy meeting, did not seem worried about a sharp drop in inflation in the region. He blamed it on the countries that had needed some kind of bailout.
“Much of the decline in inflation – in core inflation – actually comes from the four program countries: Spain, Ireland, Portugal and Greece. So, all in all this would signal more a relative price adjustment than any deflation phenomenon taking place. So I have tried to give you a sense of how complex is the picture, which would explain why – before taking any decision today – we would wait.”
In those battered economies people are spending less so inflation is weak, or in the case of Greece prices are falling dramatically. The ECB’s inflation target is around 2.0%.
However Draghi is wary of it getting stuck in what he has called a “danger zone”, below 1.0 percent, thereby hampering the fragile economic recovery.
Draghi said: We have to dispense with this idea of deflation. The question is: is there deflation? The answer is no. Although there is going to be a low level of inflation for a protracted period of time, but deflation? No.
Further on he said the modest recovery is showing encouraging signs. The demand side is getting stronger, not weaker. We have to treat the recovery with extreme caution. It is very fragile. It is starting from very low levels but it is proceeding.