Forex Trading: Currency Briefing – Deflation ‘the potentially new challenge’

By: Tsvyata Petkova
Tsvyata Petkova
Tsvyata reports prmarily on foreign exchange market and daily fx rates. Today, she is a leading FX Dealer for… read more.
on Feb 25, 2014
Updated: Oct 21, 2019

With conclusion of the G-20 meeting in Sydney, the markets are left with the words of European Central Bank president Mario Draghi as regards “the full set of information needed for deciding whether to act or not” before March 6, when the Governing Council, the ECB’s policy-setting body will meet and reveal its 2016 inflation projections.

Eurozone CPI rose an annualised 0.8 percent in January, Eurostat reported yesterday, exceeding its flash reading of 0.7 percent. It was the fourth straight reading below one percent, whereas of course the ECB’s objective is to keep inflation at just below two percent. Additionally, consumer prices posted their biggest monthly decline since records began in 2001.

Draghi didn’t address the threat of deflation – defined as a persistent downward trend in prices that threatens consumer spending, wages, business profits and investment – but the markets are anxious to understand what the next ECB move will be. According to a JP Morgan analyst note over the weekend, the EONIA market for inter-bank overnight accommodation is pricing in about a 50 percent chance of a 10 basis-point cut in the ECB’s refinancing and deposit rates by mid-year.

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Former ECB president Jean-Claude Trichet yesterday told a business economics conference that “deflation is a potentially new challenge”. Mr. Trichet, who headed the ECB from 2003 to 2011, observed that Eurozone policy-makers should not rule out the risk of deflation, given the recent low inflation readings in the bloc.

Last week, ECB Executive Board member Peter Praet said that, once it had decided to “act without hesitation”, the options for the ECB included cutting the refinancing rate from its record-low 0.25 per cent, ending the removal of excess liquidity from ECB bond purchases, charging banks for keeping cash at the central bank overnight, and printing money in the process known as quantitative easing.

Across the Atlantic, the US Federal Reserve has also been struggling with below-target inflation despite its aggressive efforts to spur stronger growth. Fed officials say they are monitoring the situation and remain expectant that strong inflationary expectations will pull the inflation rate closer to their two per cent objective within the next couple of years.

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