Draghi primes ECB to act as inflation scarcity prompts alarm

By Scott Hamilton

Mario Draghi will confront the threat of deflation this week as he prepares to unleash an array of measures to jolt the economy and ignite prices.

From negative interest rates to conditional liquidity for banks, the European Central Bank president and his colleagues have signaled all options are up for discussion when they meet on June 5. Before then, data tomorrow may reinforce the view that action is needed, with economists predicting a grim mixture of too-low inflation and unemployment near a record.

Draghi has braced investors with warnings on a potential “negative spiral” of prices, and will have new ECB forecasts likely to include a lower outlook for inflation and growth. Those projections will inform talks in the next three days with his management team and then in the wider Governing Council as officials determine how radical a response is needed.

“If you look at the broader array of economic data that is currently out there, then pretty much all of it points to the need for further stimulus,” said James Ashley, chief European economist at RBC Capital Markets in London. “We’re looking at conventional and unconventional steps.”

Of 50 economists surveyed by Bloomberg News, 44 expect the ECB to become the first major central bank to take interest rates into negative territory by cutting its deposit rate. All but 2 of 58 respondents said the benchmark rate would also be reduced.

“We are ready to act,” ECB Vice President Vitor Constancio said on May 30. “We are not complacent about the risks from a protracted period of low inflation.”

Inflation Data

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