Falling inflation a worry for Europe but also the world
A sickly Europe has held back global economic growth for years, and now it is contributing significantly to powerful forces already dragging down inflation across the globe. European Central Bank President Mario Draghi has moved closer to launching sovereign debt purchases and data this week will show just how dangerously low inflation has fallen in the $13 trillion euro zone economy
A spectacular drop in crude oil prices over the past month will be the centre of discussion when ministers from the world’s top oil exporters meets in Vienna on Friday. The key question there is whether Saudi Arabia, which signalled last month it was comfortable with lower oil prices, accelerating a plunge in the price of crude to a third since June, will stick to that view.
But rapidly-increasing U.S. oil production, coinciding with shaky demand from China and Europe, is likely to keep a lid on the price no matter what the Organisation of Petroleum Exporting Countries (OPEC) decides. The latest euro zone inflation relapsed to 0.3 percent in November, far from the ECB target of just below 2 percent.
Despite years of zero interest rates across mature economies and trillions of dollars worth of emergency stimulus from central banks, alarm bells are ringing worldwide. Japan’s experiment in raising sales taxes to try to revive inflation spawned news of yet another recession.
The People’s Bank of China, which is dealing with a falling property market and an inflation rate that has tumbled to just 1.6 percent, unexpectedly cut its main interest rates for the first time in more than two years on Friday. The ECB, with rates as low they can go, has been doing everything in its power short of printing money – an option staunchly opposed by Germany.
Bank credit to the private sector has been contracting for more than two years and the few economists who gave a forecast expect another roughly 1 percent fall compared with a year ago.Even if the ECB does engage in sovereign QE, it may not make much difference with euro bond yields already so low.
The main effect would be to “contribute to a further depreciation of the euro to $1.15 by end-2016 and mitigate the upward pressure on bond yields in the euro zone that is likely to result from rises in U.S. Treasury yields as the Fed tightens the reins,” wrote Melanie Debono at Capital Economics.
But a rise in U.S. Treasury yields has been part of many economists’ forecasts for years now. Despite solid growth and modest inflation – likely to be confirmed in official data next week – Treasury yields have either remained low or moved lower. With so many central banks having eased or prepared for possible easing over the last several months, it is becoming increasingly doubtful that the Federal Reserve will raise its benchmark rate from a record low by the middle of next year.
Source:Reuters
