Eurozone deflation? ‘NO!’ – well at least not for now

THE ECB has taken its decision on interest rate policy in the eurozone for March. The central bank decided to keep all rates on hold for this month – a controversial decision given the rising concerns of deflation in the bloc over the last few months. In terms of the Consumer Price Index on a year-on-year basis which essentially measures the level of inflation, this fell to a record low of 0.7% in December 2013, bear in mind the ECB’s target is 2%.

Mario Draghi, the ECB president, noted in his latest press conference that the ECB did not see enough economic change to warrant any action from the bank. Inflation levels in February year over year moved back up to 1%, obviously a much better figure than a few months ago. If we were to have seen a further decline to the inflationary levels in the eurozone, then markets very well could have witnessed further accommodative action from the Central Bank this time round.

There were several economist and analyst placing outside bets for a cut to the main benchmark rate and also for the ECB to potentially introduce a negative deposit rate, which would essentially cost banks to leave money in their reserves. If enacted this would promote further liquidity in the markets via lending and more borrowing, thus encouraging spending. Many in the market expected this and sold the euro in anticipation. Instead the “nothing done” stance of the ECB led to a correction and pushed the euro to hit new highs.

The euro gained a lot of ground across the board following the ECB’s Draghi press conference, given the fact that the bank has seen no need for any type of stimulus for the time being. However, he did note the ECB remains determined to maintain the high degree of accommodative monetary policy for as long as needed, and will take further actions as it sees fit.

UK importers will certainly not be happy with having to deal with GBP/EUR exchange below 1.20, unless of course they took advantage of the levels prior to the recent EUR move. UK exporters should certainly take advantage of these current rates, reason being the picture in the UK economic recovery remains balanced, in comparison with the various underlying issues in the eurozone that are still looming. There is still plenty of upside potential for the GBP against the euro.

Ken Chigbo, Global Reach Partners