Sound bites: Eurozone deflation beckons and the ECB needs to act fast

Eurozone inflation dropping to 0.5% is a disaster. The Eurozone is staring into the jaws of deflation and must act now with another radical ease in monetary policy. Eurozone inflation running so low and unemployment running so high are the big giveaways that ECB policy still remains too tight and another ease should be a done deal this week. Headline inflation has been in the ECB’s sub-1% danger zone for far too long. High unemployment running at 11.7% is the reason Eurozone voters have had enough and why there was such a big political backlash at the recent European elections. EU leaders now understand that growth and jobs are the new political imperatives. It is up to the ECB to listen hard and put faster recovery in the spotlight this week. A rate cut into negative territory, increased business lending and extra liquidity measures are a done deal this week. The ECB needs to do much more and start thinking outside the box. Judging by the forward guidance so far, the ECB are unlikely deploy their ‘big bazooka’- quantitative easing – this week. It looks as if the ECB will keep their quantitative easing option under wraps for the time being. The ECB probably want to keep QE in reserve given the bank’s concerns that the economic outlook could deteriorate again. The Eurozone has still not reached critical escape velocity from the forces of recession and deflation. Low inflation and odds of another major ease from the ECB will hit the euro hard. A break below USD1.35 is on the cards very soon and a return to sub-USD1.30 looks inevitable.