Inflation key trigger for stimulus

Falling inflation will be a key trigger in any decision by the European Central Bank (ECB) to beef up its economic stimulus package, an executive board member said on Tuesday.

Yves Mersch said in a speech in Singapore that it was still too early to determine whether factors like slowing growth in emerging markets and a strong euro will affect the inflation target for the eurozone.

While the eurozone has shown signs of resilience, the macroeconomic environment has become "more challenging" and the ECB's recent forecasts indicate a weaker economic recovery and a slower rise in inflation rates, he said.

Inflation "will remain close to zero in the very near term before rising again towards the end of the year," he told a financial forum in Singapore, according to a copy of his speech released to the media.

"It will take somewhat longer than previously anticipated for inflation to return to a rate that we consider sufficiently close to 2.0 percent and stabilise at that rate," he added.

Mersch spelled out three reasons for the outlook: a slowdown in emerging market growth, a stronger euro and the sharp decline in oil prices.

But he also said "it is too early to judge whether these factors will cause lasting changes to the trajectory that the ECB expected inflation to follow" and the bank will be closely monitoring how they affect price stability.

"In the event that the downward risks I have mentioned weaken the inflation outlook over the medium term more fundamentally than we currently project, we would not hesitate to act," he said.

"Should more monetary policy impulse become necessary, the ECB is determined to use all available instruments to achieve its mandate over the medium term."

Mersch was speaking ahead of an October 22 meeting of the ECB's governing council amid speculation the bank would strengthen its bond-buying programme aimed at pushing eurozone inflation back up to levels that are more conducive to healthy economic growth, or extend it beyond its original duration ending in September 2016.

The ECB launched the highly controversial programme, known as quantitative easing, or QE, in March under which the bank plans to buy as much as 1.1 trillion euros ($1.3 trillion) of bonds at a rate of 60 billion euros per month until September next year.

The scheme appeared to work initially but a renewed decline in oil prices and the economic slowdown in China and other emerging markets have pushed area-wide inflation expectations back down, reigniting fears of a potentially dangerous downward spiral of falling prices.
Source: AFP