The European Central Bank may have to increase its quantitative easing program following a report which shows that efforts to bring inflation levels up in Europe may be failing.
On Wednesday, the European statistics agency Eurostat said that annual inflation was down to 0.1 per cent in August from 0.2 per cent in July, partially due to lower global energy prices.
Both figures are dismal; the ECB has always maintained that a two per cent inflation rate across the 28-member bloc (eurozone and non-euro countries) was ideal to spur economic growth.
“Compared with July 2015, annual inflation fell in fourteen Member States, remained stable in four and rose in ten,” the Eurostat report showed.
The rampant low inflation rate for the past two years is one of the reasons the eurozone moved to operate the QE mechanism which involves the ECB buying back 60 billion euros ($68 billion) every month until the program terminates in September 2016 – a total stimulus of 1.1 trillion euros.
Essentially, the ECB is buying back government bonds that were purchased by the banks. This in turn creates more money in circulation in the Eurozone economies.
It is tantamount to printing more money and is used by most advanced nations as a means to revitalizing the economy when existing monetary policy proves to be inadequate.
The bond-buying – or QE – mechanism therefore provides banks with more funds to use for loans to finance projects and fuel investment.
But this may not be working. “Negative annual rates were observed in eleven Member States,” Eurostat says.
Cyprus registered -1.9 per cent inflation – effectively deflation. Romania came at -1.7 per cent while Malta was in positive territory with 1.4 per cent, nearing the ECB’s standard of two per cent.
Austria and Belgium also registered positive inflation rates, but both under one per cent.
Why is deflation bad?
The ECB says that low inflation – or deflation – can postpone growth as consumers wait for bargain prices for goods and services.
Eventually, this leads to inadvertent stagnation.
The ECB has maintained that a two per cent inflation rate is ideal for economic growth.
Earlier, the International Monetary Fund said it was concerned that European economies were not moving out of recession quickly enough.
ECB chief Mario Draghi has previously hinted that QE could be extended past the 2016 date.
The BRICS Post with inputs from Agencies