Europe fears deflation as Ukraine stays centre-stage

ROME - The eurozone's growing fears of deflation will be stirred again on Friday when preliminary consumer price data for August will be issued with signs that the European Central Bank (ECB) could be looking at bolder steps to help the region's stagnant economy.


Analyst polled by Reuters forecast the annual inflation rate to slip to 0.3 per cent from 0.4 per cent in July, falling even further below the ECB's target of below but close to two per cent and mired deep in what the bank calls the "danger zone." The ECB cut interest rates in June and promised banks cheap long-term loans starting in September and any new measures before those loans kick in had been considered unlikely.


However, in remarks that opened the door to possible policy action at the bank's next meeting in September, ECB President Mario Draghi said on Friday that the bank is prepared to respond with all its "available" tools should inflation drop further.


Speaking at a global central banking conference in Jackson Hole, Wyoming, Draghi said he is confident that the steps already announced, helped by a weaker euro would boost demand in the ailing economic bloc. But in stronger language than he has used in the past, he stressed the central bank stands ready to do more. "The (ECB's) governing council will acknowledge these (economic) developments and within its mandate will use all the available instruments needed to ensure price stability over the medium term," he said.


The main weapon at the bank's disposal, printing money to buy bonds, known as Quantitative Easing (QE), is still opposed by Germany's Bundes bank which plays down the danger of deflation. In his remarks on Friday, Draghi did not mention the policy specifically, but a growing number of analysts believe it is only a matter of time before the ECB follows the path already trodden by the Federal Reserve and the Bank of England.


"The ECB will ultimately move to QE unless the euro weakens appreciably," said Riccardo Barbieri, chief European economist at Mizuho, adding that, "In the near term stagnation and near-zero inflation in the eurozone are almost a certainty. Developments in Ukraine will continue to be a major focus for markets, with the negative headlines of recent weeks having pushed German bond yields to new lows."

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