Sound bites: no Eurozone inflation pressures - headline inflation at 1.2% in April vs 2% ECB target

With headline inflation running so low below the 2% target and the Eurozone so deeply steeped in recession, it proves the ECB’s policy settings are still far too tight. This is a clear green light to the ECB to ease monetary policy again very quickly. With disinflation trends already entrenched, at some stage the ECB will need to start worrying that the next step could be deflation. The ECB cannot to afford to be complacent as any delay would be at the Eurozone’s peril. If deflation risks set in it would be very hard to vanquish as Japan is learning to its cost right now.

On both sides of the price equation, inflation pressures are extremely light. On the demand side, the recession is keeping a lid on domestic prices and wages, especially while unemployment mounts. On the supply side, energy and commodity price rises are less of a threat, especially while the strong euro remains such an effective inflation foil. With money supply growth and headline inflation running so low below target, the ECB has no reasonable excuse not to ease again soon. In fact it is imperative that they act very quickly to avoid getting further behind the curve on easing. The ECB have dragged their feet far too long. Mercifully, Draghi seems to be picking up the baton for a more much proactive approach than his predecessor Trichet.

While the rate cutting cycle is close to the end of its cycle, there is plenty more the ECB can do through conventional and unconventional means. The ECB should ensure it plies the Eurozone with plenty of excess liquidity to turn domestic credit contraction into credit expansion. It needs to get much stronger lending flows through to consumer and corporate borrowers to fuel stronger economic activity. The ECB also needs to exorcise its demons and consider extra monetary measures through quantitative easing. If the US and Japan can succeed in propping up their economic recoveries through quantitative easing, it is an anathema that the ECB needs to vanquish very soon for the Eurozone economy’s sake.