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Home / Analytics / Forex analysis & forecasts / Forex Fundamental analysis / When deflation is knocking at the door. Fundamental review on March 1, 2016
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When deflation is knocking at the door. Fundamental review on March 1, 2016


When deflation is knocking at the door

Inflation in the Euro zone became negative once again for the first time since September last year, falling to the level of -0.2%. For the most part, the reason is the falling oil prices, as core inflation, which excludes the most volatile components such as energy and food, was + 0.7%. However, after yesterday statistics, expectation of further easing by the ECB is intensified since the return of deflation is hardly needed in Euro zone.

And Mario Draghi already has pointed out that the long period of low commodity prices may lead to the effects of the economy, which the ECB is trying to fight. Perhaps, partly wanting to assess the extent of this influence, regulator 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 - if inflation back to the target values about of 2%, the ECB would be much more difficult to carry out its ongoing programs, as the latter would be accompanied by accusations of inflation acceleration of inflation. Now, Mario Draghi has the right to act, because the fight against deflation is the mandate of the ECB, in contrast to the economy and support measures to fight the unemployment.

Actually, the question is: why deflation is so bad? At first glance, the decline of oil prices is a positive factor for consumers’ spending. It's all about the so-called "deflationary mindset" when consumers begin to delay purchases, expecting further price reductions. In the situation like that, not only inflation goes negative, but a number of other indicators, such as retail sales and, of course, the dynamics of GDP.

That is why Central banks around the world spare no effort and funds to fight the low inflation as a "nightmare" of any regulator is the so-called "deflationary spiral" when consumers see another decline in prices and expect their further decline, and so on - until the severe crisis in the economy. In some ways, an example of such situation could be observed in Greece in recent years, where deflation was strongest among the Euro zone countries.

When deflation is knocking at the door. Fundamental review on March 1, 2016

Accordingly, it is very likely that in his meeting on March 10th 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 will increase its monthly volume (60 billion Euros), or will extend the validity period (currently the program adopted until March of 2017). Expectations of such measures are already leading to a decrease in the euro-dollar pair and if the regulator will carry out these measures, then we are waiting for "exciting" the bearish trend.

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Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex bears no responsibility for trading results based on trading recommendations described in these analytical reviews.