16th May 2014

Eurozone inflation higher, but still too low. ECB to take action

As expected, inflation in the eurozone rose in April by 20 basis points to 0.7%. Economists predicted a certain rise due to the Easter holidays, during which prices in tourism tend to go up. However, the April number is still far below the ECB´s inflation target of „lower, but close to 2%“. The ECB and its president Mario Draghi have been under pressure to take action, otherwise the fragile economic recovery in the eurozone might perish. Looking more closely at the statistics, however, proves president Draghi´s argument, that the overall number is dragged down by the tough austerity measures with severe deflationary effects in the Southern eurozone states. Thus, inflation in Germany and Austria was 1.1% and 1.6% respectively. On the other hand, the number for Greece was -1.6%. Also, the inflation would be 1.4% were it not for the decrease in energy prices, which was by 0.4%.

Despite the intra-eurozone inflation differentiation and energy deflation, ECB is likely to take action in June against the low inflation levels. As ECB Executive Board member Peter Praet indicated for Spiegel, he will recommend that the Governing Council lowers the main refinancing rate to a new record of only 0.15%, down from the current 0.25%. Also, the ECB should lower the now 0% rate on bank deposits to -0.1%. Banks making deposits with the central bank would thus have to pay to make such deposits. Employing this non-standard measure, the ECB would like to motivate the commercial banks to provide more credits instead.

For more, click here and here.

Members of the American Chamber of Commerce in the Czech Republic