By DAVID JOLLY
Launch media viewerA store window advertised sale prices in Athens last month. Aris Messinis/Agence France-Presse — Getty Images
PARIS — Whether or not Mario Draghi and his European Central Bank colleagues plan to do anything about it at the monthly meeting Thursday, many economists are sounding the alarm. It is time, they say, to act defensively against the danger of deflation.
“We don’t know if we’re in deflation now, but we can’t afford to take the risk,” said Gilles Moëc, chief European economist at Deutsche Bank in London. “The problem is that it’s very hard to know when you’re in it, and usually when you do, it’s too late. That’s what Japan found.”
Officially, the 18-nation euro zone so far has been experiencing “disinflation” — a falling rate of inflation. Consumer prices ticked up just 0.7 percent in January from a year earlier, matching the record low set in October, according to an estimate by Eurostat, the European Union’s statistical agency.
The European Central Bank tries to maintain an inflation rate of just below 2 percent.
When it takes hold, deflation — a decline in the general level of prices — undermines growth, and lowers corporate earnings and the values of assets like real estate. And in economies burdened by a debt overhang, as much of the euro zone still is, deflation can drive a self-reinforcing downward spiral, in which borrowers are bankrupted by their inability to repay loans on devalued assets.
That has played out in Japan, where land prices have fallen almost every year since the country’s economic bubble burst in the early 1990s, with disastrous consequences for banks, companies and the finances of a generation of savers.
In contrast to inflation, which erodes the real value of loans, making it easier for borrowers to repay, deflation does the opposite. It makes money dearer, raising the burden of repaying existing loans — and adds to the stress on fragile banks that hold the loans when borrowers cannot repay. The E.C.B., which is undertaking a careful review of banks’ finances in its new role as bank supervisor for Europe, is keenly aware of that danger.
The central bank’s Governing Council meets on Thursday with its president, Mr. Draghi.
The bank cut its main rate target in November to a historic low of 0.25 percent after inflation for October came in at a record low. But the bank’s ability to use interest rates, the conventional tool for influencing prices, is limited by the fact that nominal interest rates cannot go below zero.
The E.C.B., which sets monetary policy for the euro zone, has argued that there are limits to what it can do.
“In a deflationary environment, monetary policy may thus not be able to sufficiently stimulate aggregate demand by using its interest rate instrument,” the E.C.B. says on its website. “This makes it more difficult for monetary policy to fight deflation than to fight inflation.”
Many economists argue, though, that it is already past time for the E.C.B. to take some sort of further action. And the International Monetary Fund was warning as early as last summer of the possibility of a debt-deflation spiral in the euro zone.
“There is nothing magical about the number zero, when inflation turns to deflation,” Olivier Blanchard, chief economist of the International Monetary Fund, noted in a recent blog post. “But the lower the inflation rate goes, and a fortiori the larger the deflation rate, the more dangerous it is for the euro recovery,” Mr. Blanchard wrote. “To avoid that risk, accommodative monetary policy by the E.C.B. remains of the essence.”
By whatever definition, some euro members are experiencing deflation now. Greece and Cyprus have been posting across-the-board price declines, and Portugal, Spain and Ireland are a whisker away from zero. Even in Germany, haunted by the historical hobgoblin of inflation fears, prices rose at an annual rate of just 1.2 percent last month.
Mr. Moëc said the bank could use “technical measures” to increase the amount of cash in the market by as much as 160 billion euros, or $216 billion. Or it could “send a signal” with a small rate cut, perhaps reducing its main rate down to 0.15 percent. He also suggested the E.C.B. could take the extraordinary step of changing the interest rate it pays banks for their excess deposits — currently at zero — to minus 0.10 percent. That negative rate, in effect, would force banks to pay the E.C.B. to hold their money.
“That sends the message that ‘I haven’t reached the limits of interest rate policy,"’ Mr. Moëc said.
Negative interest rates, however, have been employed only rarely by central banks, with uneven results. And Mr. Moëc noted that with emerging markets currently looking precarious, negative rates could have unforeseen, and potentially destabilizing, consequences for both the euro currency and global markets.
Still, Mr. Moëc said, taking such measures now would reassure the market that the bank is determined to stave off deflation — and if necessary would pave the way for a future “quantitative easing” stimulus plan like those that have been employed by the Federal Reserve, the Bank of Japan and the Bank of England. In those campaigns, which the Fed has begun “tapering” off, the central banks bought hundreds of billions of dollars worth of bonds to flood the market with liquidity and keep borrowers afloat.
Mr. Draghi has said the bank will consider all the tools at its disposal to fight deflation. But he has also expressed confidence that there is nothing to worry about just yet. As he told the Swiss newspaper Neue Zürcher Zeitung in a recent interview, “The risks of deflation or inflation are limited at this point in time.”
Many economists would argue otherwise.
http://www.nytimes.com/2014/02/06/business/international/economists-sound-the-alarm-on-deflation-in-europe.html?_r=0
Launch media viewerA store window advertised sale prices in Athens last month. Aris Messinis/Agence France-Presse — Getty Images
PARIS — Whether or not Mario Draghi and his European Central Bank colleagues plan to do anything about it at the monthly meeting Thursday, many economists are sounding the alarm. It is time, they say, to act defensively against the danger of deflation.
“We don’t know if we’re in deflation now, but we can’t afford to take the risk,” said Gilles Moëc, chief European economist at Deutsche Bank in London. “The problem is that it’s very hard to know when you’re in it, and usually when you do, it’s too late. That’s what Japan found.”
Officially, the 18-nation euro zone so far has been experiencing “disinflation” — a falling rate of inflation. Consumer prices ticked up just 0.7 percent in January from a year earlier, matching the record low set in October, according to an estimate by Eurostat, the European Union’s statistical agency.
The European Central Bank tries to maintain an inflation rate of just below 2 percent.
When it takes hold, deflation — a decline in the general level of prices — undermines growth, and lowers corporate earnings and the values of assets like real estate. And in economies burdened by a debt overhang, as much of the euro zone still is, deflation can drive a self-reinforcing downward spiral, in which borrowers are bankrupted by their inability to repay loans on devalued assets.
That has played out in Japan, where land prices have fallen almost every year since the country’s economic bubble burst in the early 1990s, with disastrous consequences for banks, companies and the finances of a generation of savers.
In contrast to inflation, which erodes the real value of loans, making it easier for borrowers to repay, deflation does the opposite. It makes money dearer, raising the burden of repaying existing loans — and adds to the stress on fragile banks that hold the loans when borrowers cannot repay. The E.C.B., which is undertaking a careful review of banks’ finances in its new role as bank supervisor for Europe, is keenly aware of that danger.
The central bank’s Governing Council meets on Thursday with its president, Mr. Draghi.
The bank cut its main rate target in November to a historic low of 0.25 percent after inflation for October came in at a record low. But the bank’s ability to use interest rates, the conventional tool for influencing prices, is limited by the fact that nominal interest rates cannot go below zero.
The E.C.B., which sets monetary policy for the euro zone, has argued that there are limits to what it can do.
“In a deflationary environment, monetary policy may thus not be able to sufficiently stimulate aggregate demand by using its interest rate instrument,” the E.C.B. says on its website. “This makes it more difficult for monetary policy to fight deflation than to fight inflation.”
Many economists argue, though, that it is already past time for the E.C.B. to take some sort of further action. And the International Monetary Fund was warning as early as last summer of the possibility of a debt-deflation spiral in the euro zone.
“There is nothing magical about the number zero, when inflation turns to deflation,” Olivier Blanchard, chief economist of the International Monetary Fund, noted in a recent blog post. “But the lower the inflation rate goes, and a fortiori the larger the deflation rate, the more dangerous it is for the euro recovery,” Mr. Blanchard wrote. “To avoid that risk, accommodative monetary policy by the E.C.B. remains of the essence.”
By whatever definition, some euro members are experiencing deflation now. Greece and Cyprus have been posting across-the-board price declines, and Portugal, Spain and Ireland are a whisker away from zero. Even in Germany, haunted by the historical hobgoblin of inflation fears, prices rose at an annual rate of just 1.2 percent last month.
Mr. Moëc said the bank could use “technical measures” to increase the amount of cash in the market by as much as 160 billion euros, or $216 billion. Or it could “send a signal” with a small rate cut, perhaps reducing its main rate down to 0.15 percent. He also suggested the E.C.B. could take the extraordinary step of changing the interest rate it pays banks for their excess deposits — currently at zero — to minus 0.10 percent. That negative rate, in effect, would force banks to pay the E.C.B. to hold their money.
“That sends the message that ‘I haven’t reached the limits of interest rate policy,"’ Mr. Moëc said.
Negative interest rates, however, have been employed only rarely by central banks, with uneven results. And Mr. Moëc noted that with emerging markets currently looking precarious, negative rates could have unforeseen, and potentially destabilizing, consequences for both the euro currency and global markets.
Still, Mr. Moëc said, taking such measures now would reassure the market that the bank is determined to stave off deflation — and if necessary would pave the way for a future “quantitative easing” stimulus plan like those that have been employed by the Federal Reserve, the Bank of Japan and the Bank of England. In those campaigns, which the Fed has begun “tapering” off, the central banks bought hundreds of billions of dollars worth of bonds to flood the market with liquidity and keep borrowers afloat.
Mr. Draghi has said the bank will consider all the tools at its disposal to fight deflation. But he has also expressed confidence that there is nothing to worry about just yet. As he told the Swiss newspaper Neue Zürcher Zeitung in a recent interview, “The risks of deflation or inflation are limited at this point in time.”
Many economists would argue otherwise.
http://www.nytimes.com/2014/02/06/business/international/economists-sound-the-alarm-on-deflation-in-europe.html?_r=0
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