ECB under pressure to cut interest rates in face of growing deflation
Latest collection of economic data a worrying sign for euro zone economy
The euro sculpture outside the headquarters of the European Central Bank in Frankfurt. The ECB council will decide today whether to change interest rates. Photograph: Kai Pfaffenbach/Reuters
The European Central Bank will face more than the usual level of scrutiny when its governing council gathers in Frankfurt today for its regular monthly rate-setting meeting. A series of economic indicators over the last few days suggests worrying signs that the euro zone’s tentative economic recovery may be losing momentum.
On Tuesday the European Commission downgraded its forecast for economic growth for the euro zone next year. It now expects the euro zone eco- nomy to grow by 1.1 per cent in 2014, compared to its forecast of 1.2 per cent six months ago. Closely watched manufacturing figures – which give a snap- shot of how businesses across the continent are faring – showed a sharp decline in manufacturing activity across the EU, although with some notable exceptions, including Britain and Germany.
Of particular significance for the ECB, given its mandate to regulate inflation, is the deflationary trend that has begun to creep into the euro zone economy. Inflation fell sharply in October to 0.7 per cent – well below the bank’s target of keeping inflation “close to but below” 2 per cent.
The accumulation of worrying economic figures has increased pressure on the bank to take action today in Frankfurt, despite the fact that interest rates are at a historic low of 0.5 per cent. While an interest rate cut is highly probable, some analysts expect that concrete measures will be postponed until December.
At the very least, ECB presi- dent Mario Draghi is expected to signal the bank’s intention to take further stimulus action, whether through rate cuts or other forms of monetary easing, such as another bond-buying type programme.
The collection of economic data is a worrying sign for the euro zone economy, more than five years into the crisis.
Despite the fact that the euro zone officially emerged from an 18-month recession earlier this year with the bloc experiencing GDP growth of 0.3 per cent in the second quarter, the picture remains bleak.
Tuesday’s economic forecast from the European Commission cut the growth prospects for virtually all countries in the euro zone. The reason, according to economic commissioner Olli Rehn, is a mixture of exter- nal factors, such as the recent slowdown in emerging economies, and internal factors, such as the continuing effect of an “ongoing necessary adjustment process” in euro zone countries as they continue to implement fiscal consolidation measures.