MONETARY POLICY
IS EUROPE THE NEW JAPAN ? Whatever the answer, ECB needs to do more
“Central banks don’t have divine wisdom. Tey try to do the best analysis they can and must be prepared to stand or fall by the quality of that analysis.” Mary Kay Ash, American businesswoman
“In central banking as in diplomacy, style, conservative tailoring, and an easy association with the affluent count greatly while
results John Kenneth Galbraith far much less”
FX
The Euro Zone’s inf lation rate has
been heading relentlessly
lower. In November 2011, it was 3.0% year on year. Provision data for November 2013 showed it had fallen to 0.9%. Yes, that was up a little on October’s level, but
producer prices data and
the absence of strong growth anywhere in the region suggest the balance of risk is that inf lation falls further.
The problem is actually extending across most of Europe, even outside the strictly speaking Euro Area. Since April, prices (adjusted for taxes) have fallen in Greece, Italy, Netherlands,
Portugal, Slovenia and Slovakia, as well as in the non-EMU group of Bulgaria, the Czech Republic, Latvia, Lithuania, Hungary and Romania. Prices have been falling in Spain since May, in France since June and even in Germany over the past three months.
Def lation is generally seen as a negative phenomenon. When inf lation is close to zero, companies, households and even governments have a harder time cutting their debt loads. Profits are
squeezed—threatening
investment and jobs—and consumers may hold off on big- ticket purchases.
Modern central banks strive to keep inf lation low, but significantly above zero; several have set 2% as their medium-term goal. Very high rates of inf lation, like the double-digit rates of the late 1970s, distort markets, hurt lenders and can undermine economic and political stability. Falling prices, or def lation, can also distort markets, prompt consumers and business to defer purchases until prices fall and can hurt borrowers; it also makes it nearly impossible for a central bank to cut inf lation-adjusted interest rates below zero, as they often do in recession. Keeping inf lation comfortably above zero
FX TRADER MAGAZINE January - March 2014 43
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