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Main » 2016 » March » 1 » Fundamental Forecast 01.03.2016: When deflation is knocking at the door.
Fundamental Forecast 01.03.2016: When deflation is knocking at the door.

Inflation in the euro zone again became negative for the first time since September last year, falling to the level of -0.2%. For the most part, the culprit was the falling oil prices, as core inflation, which excludes the most volatile components such as energy and food, was 0, 7%. However, after yesterday's statistics, expectations of further easing by the ECB only intensified since the return of deflation is hardly anyone in the euro area need.



Moreover, the earlier Mario Draghi has pointed out that the long period of low commodity prices may lead even to the effects of the economy, which the ECB is trying to fight. Perhaps, partly wanting to assess the extent of this influence, control, and did not increase the amount of incentive programs earlier in the year. However, at the February meeting, there were calls for more action to return inflation to acceptable levels.
However, yesterday's statistics can be perceived in a different way, because if inflation back to the target values ​​in the region of 2%, the ECB would be much more difficult to carry out its ongoing programs, as the latter would be accompanied by a flurry of accusations of this acceleration of inflation itself. Now, Mario Draghi has every right to act, because the fight against deflation in the right part of the mandate of the ECB, in contrast to the measures to support the economy and fight unemployment.  
Actually, the question arises, what is so bad deflation? After the decline in oil prices, at first glance, it is a positive factor for consumer spending. It's all about the so-called "deflationary mindset" when consumers begin to delay purchases, expecting further price reductions. In this scenario, minus goes not only inflation, but a number of other indicators, such as retail sales and of course, the dynamics of GDP.
This is why central banks around the world have spared no effort and funds to fight the low inflation since the nightmare of any control is the so-called "deflationary spiral" when seeing another decline in prices consumers expect their further fall, and so on around the circle to the severe crisis in the economy. In some ways, an example of such events could be observed in Greece in recent years, where deflation was strongest among eurozone countries.

When deflation is knocking at the door. Fundamental review on 01/03/2016
Accordingly, it is very likely that in his meeting on 10 March The ECB announces a new wave of monetary policy easing. Among the possible measures referred to another reduction in the deposit rate (currently 0.3%), as well as the expansion of the quantitative easing program. The question is whether the regulator to increase its monthly volume (60 billion euros), or extend the validity period (currently before the program was adopted in March 2017). Expectations of such measures is already leading to a decrease in the eurodollar and if the regulator still sells, then we are waiting for a fascinating bearish trend.

Author: Stanislav Koval

Analytical department of the company RoboForex


Forecasts of the financial markets are the personal opinion of their authors. The current analysis is not a guide to trading. RoboForex Company is not responsible for the results that may arise from the use of trading recommendations submitted reviews.



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