There had been speculation in some quarters that the ECB might drop its interest rate even lower from its already historic low as a mechanism to inject a little inflation into the Eurozone economy. Despite inflation running at 0.8% well below its 2% target figure the ECB resisted this temptation. As has been seen in Japan, long-term deflation can act as a dampener to domestic demand as consumers delay significant purchases in the knowledge that they will be lower at some future date when they must make the purchase.
Mario Draghi, ECB President, had made it clear last month that the ECB were not concerned about deflation, pointing out that prices are still rising month on month, albeit at a slower rate than “target”. The Bank expects that inflation will remain low for a prolonged period of time, a position it first announced in November 2013. The interest rate has been maintained at 0.25% since the same date. It expects that inflation will take two years to hit its target level of 2% - consumers will be happy with a slower rate of price rises, of course, even if some economists fret over it.
The ECB expects that the Eurozone economy will grow by 1.2% this year; the Eurozone PMI is at its best level since June 2011, as we reported earlier this week. Mr Draghi identified the current geopolitical tensions in Ukraine as a potential threat to growth, unless a negotiated solution is found.
For its part, the Bank of England surprised nobody by leaving its interest rate on hold at 0.5% where they have been since March 2009. Bank of England “forward guidance” was recently modified to consider a wider basket of parameters, but even with the revised system, the Bank says it does not envisage a rate rise until the spring of next year, at the earliest.