Eurozone deflation risk eliminated by ECB – Benoit Coeure

by Jonathan Adams

ECB Executive Board member Benoit Coeure said Friday the European Central Bank’s decision to further cut its deposit rate into negative territory and extend the existing bond-buying program has eliminated the risk of the Eurozone slipping into deflation.

Talking to reporters in Helsinki he said, “The biggest risk to inflation is now off the table: that was the risk of deflation, the risk of self-reinforcing deflationary expectations or the risk of people permanently adjusting their medium-term expectation of inflation”. He continued, “Any time there is a risk that inflation will move too far away from 2%, we can always adjust the program, as we did last week.”

Last week the ECB cut its deposit rate from minus 0.20% to minus 0.30% and extended ‘quantitative easing’, the current bond-buying program to March 2017. The inflation rate in Eurozone was consistently low for some time and stood at merely 0.1% in November. According to ECB’s latest staff projections published Thursday, the average inflation forecast for 2017 stands at 1.6%.

Coeuré said the decision also showed that ECB is capable of adjusting the bond-buying program when risks change. “This will qualify as an adjustment to the program based on facts. It also makes a point that this is a program that can be adjusted. We continue to monitor it and whenever it is needed to adjust it, we will adjust it”.

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