Euro zone inflation, or deflation, is the focus of the moment.
Germany’s HICP rate fell to 1.2 percent last month, Italy’s hit 0.6 percent and Spain’s just 0.3 in December (not to mention Greece’s -2.9 percent). Today we get the figure for the euro zone as a whole. Forecasts for it to hold at 0.9 percent may now look a little toppy.
It’s too early for any dramatic moves but the European Central Bank, which has a policy meeting on Thursday, may well be pushed into easing policy if inflation refuses to pick up and/or the banks clam up ahead of this year’s health tests.
A shock fall in euro inflation to 0.7 percent prompted an interest rate cut to 0.25 percent in November followed by a chorus of denials that deflation was a threat. ECB chief Mario Draghi adhered to that last week but added that he and his colleagues had to make sure inflation didn’t get stuck in the “danger zone” below one percent.
We pretty much know the state of play, although that does not disguise the differing camps within the Governing Council.
With rates already close to zero, there will be no rush to cut them again, another gush of long-term cheap money for the banks is possible, particularly if the looming bank health tests cause them to tighten up further, but too many ECB policymakers are viscerally opposed to printing money for that to become an option unless deflation seriously took hold.
U.S. Treasury Secretary Jack Lew will visit Paris, Berlin and Lisbon over the next two days. The last time Lew was in Europe he was indirectly critical of Germany, stressing the need for Europe to boost domestic demand. If deflation looks like becoming a threat, the imperative to boost economic activity will come into even more sharp relief.