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ECB to tackle inflation

Thu., June 5, 2014

Eurozone panel likely to drop rates, analysts say

FRANKFURT, Germany – The European Central Bank is all but certain today to cut interest rates to try to boost ultra-low inflation and strengthen the wobbly recovery in the 18 countries that use the euro.

Analysts say the bank might take its stimulus efforts further and announce extraordinary steps to get credit moving to struggling businesses.

The ECB has been under pressure to act, especially after a report this week showed that inflation in the eurozone dropped more than expected last month to 0.5 percent – further evidence of a slack economy.

Excessively low inflation, if it persists, could become a serious economic threat. It could cause businesses and individuals to delay spending indefinitely as they await ever-lower prices. It also could make it harder for companies and countries to pare their heavy debt loads left over from the eurozone’s financial crisis.

The ECB maintains a target inflation rate for the eurozone of just below 2 percent. Fears have arisen that the continent’s excessively low inflation could slip into deflation – an outright fall in prices. Deflation can stall an economy, as it did in Japan for much of the past two decades.

It’s a trap that’s hard to escape, which helps explain why Mario Draghi, the ECB’s president, has hinted strongly that the central bank will take unusual action this week.

Waning energy prices and a strong euro, which has reduced prices of imports, have been blamed for much of the fall in inflation. In countries such as Greece, where the government has held back government spending and state salaries in return for bailout loans from other countries, falling prices have been a consequence of official policies.


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