There had been speculation that the European Central Bank (ECB) would further reduce their key interest rate beyond its current record low of 0.25% during their February meeting. In the event, they decided to leave interest unchanged and ECB president Mario Draghi sought to calm nerves by underlining his opinion that the Eurozone was not heading for a deflationary period.
Speaking after the ECB meeting, Mr Draghi explained his position to journalists. "We have to dispense with this idea of deflation. The question is - is there deflation? The answer is no. There is going to be a low level of inflation for a protracted period of time, but deflation? No. The modest recovery is showing encouraging signs. The demand side is getting stronger, not weaker. We have to treat the recovery with extreme caution. It is very fragile. It is starting from very low levels but it is proceeding."
Despite the fact that inflation fell from 0.8% in December to 0.7% last month and is well below the target value of 2% seen to be a healthy level for the Eurozone economy, prices are still rising. Given that consumer sentiment seems to be cautious and that many people in the Eurozone have felt that their standard of living has been squeezed as a result of the Global Financial Crisis, sub-target inflation may be a good thing. It seems likely that some degree of economic rebalancing of citizens’ income against (arguably) excessive corporate profits will become increasingly a political reality – particularly against the backdrop of continuing austerity measures required to get Eurozone deficits back on track.
Markets have reacted favourably to the ECB lack of movement and have reversed the losing streak seen earlier in the week. The Euro has also regained some ground against the Yen, Sterling and the US Dollar.