Last week, the European Central Bank gave its strongest signal yet that it is prepared to embrace quantitative easing to prevent the eurozone from sliding into deflation or even a prolonged period of low inflation.
The ECB ignored calls from Christine Lagarde, managing director of the International Monetary Fund, to immediately deploy exceptional monetary policy measures, such as bond buying, and kept interest rates at 0.25% for the fifth month in a row.
But Mario Draghi, ECB president, sought to address concerns the central bank is complacent about ultra-low inflation by saying the governing council was united in its support for more radical action should the outlook disappoint.
“The governing council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too-prolonged period of low inflation,” he said.
Mr Draghi was thus signalling the ECB had become much more willing to take the more radical measures that the IMF has long called for. While the governing council did not take any concrete action, the ECB president raised the rhetoric and said his central bankers would be “unanimous” in backing more radical action, including QE, to cope with “too prolonged a period of low inflation””.
There is currently no sign of deflation in the euro zone, European Central Bank Governing Council member Josef Bonnici said on Tuesday.
Recent negative readings of inflation have mainly been limited to a handful of stressed countries, the central banker said in opening remarks to the Central Bank of Malta's annual report. Governor Bonnici is also the Governor of the Central Bank of Malta.
"There is at this stage no sign of deflation, or widespread price declines," he said. Rather, he said that negative price changes "are not widespread but rather concentrated mainly in the stressed countries" of the currency bloc.
Moreover, price drops were observed in only a small portion of the basket of goods measured. "In addition, there are no signs that low inflation is self-fulfilling as long-term inflation expectations remain well anchored."
"The Governing Council is looking at lower inflation from the perspective that it does not indicate deflation in the euro area" as a whole, "but it does indicate a correction that is taking place," he said.
Many of the commentators forget the eurozone is made up of 18 countries and that the problems of some Member States are different from each other
As regards inflation in Malta as compared to the euro area, Governor Bonnici pointed out that while one graph showing HICP inflation rates in Malta and the euro area shows Malta’s annual change as being higher than that of the euro area, another graph, which measures on a 12-month moving average percentage changes shows that the trend in Malta is lower than that of the euro area.
Inflation in March in the 18-country euro zone was 0.5%, the European Union's statistics agency Eurostat reported late last month. Some experts viewed the reading, a more than four-year low, as alarming, arguing that the data signalled a trend toward falling prices, or deflation. Deflation can be disastrous for an economy because it can put consumers off buying and makes repaying debt more onerous.
On Monday in London, Yves Mersch, member of the executive board of the ECB, played down the risk of deflation and said that he didn't see an asset purchase programme, known as QE, as an imminent policy step for the ECB. "QE is, above all, a theoretical concept," he said during a speech in London. "From theory to implementation is a long way."
Answering questions by this paper, Governor Bonnici seemed to side with those members of the governing council who do not think there is any call for extraordinary measures, such as QE, when there may be space for the stressed countries to emerge from the crisis on their own.
QE is one of the measures held in reserve by the ECB if things get to a point that extraordinary measures are needed. QE allows the central banks to inject liquidity into the system but the central banks and ECB have other measures in waiting. The ECB, for instance, launched the LTROs at a time when credit was hard to get in the eurozone.
He reiterated that there are 18 countries in the eurozone and this complicates matters. The eurozone is not like the US which has a totally different system. This diversity requires a more careful analysis of what is going on and that before extraordinary measures are used, the measures that are already available be used first.