BERLIN: The eurozone is not in a deflationary cycle and the European Central Bank (ECB) should not overreact to a slowdown in inflation caused largely by cyclical factors which should prove temporary, Bundesbank President Jens Weidmann said.
The comments from the head of Germany’s central bank, also a member of the ECB’s governing council, follow remarks last week which investors interpreted as a softening of long-held German resistance to more radical action to support growth.
The ECB is running official interest rates at a record low but unlike other major central banks has resisted calls to follow that move with outright “quantitative easing” to pump more money into the economy.
Weidmann said that about two thirds of the falloff in eurozone inflation to 0.7 percent, the lowest since the economy was deep in recession in 2009, could be attributed to falls in energy and food prices. “Monetary policy should respond to such factors only in the event of second round effects,” he told a conference in Berlin, saying he would not talk about current monetary policy ahead of the ECB’s monthly policy meeting on Thursday.
“With regard to the rate of inflation at the moment, the euro area is not in a self-enforcing downward spiral of price decreases, which is nominally the definition of deflation,” he said.
He said consumers were not delaying purchases in anticipation of falling prices and the bank expected a recovery to gradually push inflation rates back up.
“This is not to say that a protracted period of lacklustre growth will not be an issue for policymakers,” he said. Reuters
