The 11th Round in Draghi's Fight Against Deflation

Since becoming president of the European Central Bank, Mario Draghi has initiated 10 rounds of stimulus to get economic growth going in the European Union.

The result so far? A -0.2% inflation rate.

Inflation across the 19-country eurozone turned negative in February … .

Washington Post, Feb. 29

But surveyed economists expresssed high hopes for an expected 11th round of stimulus on March 10. That's the date of the next ECB policy meeting.

An official said the credibility of the ECB is on the line.

Read this excerpt from a March 7 Bloomberg article:

For this week’s decision, economists in a Bloomberg survey are nearly unanimous in predicting action, and the good news for Draghi is that most say it’ll be enough.

The results of the poll signal what officials might have to deliver if they want to avoid a repeat of December, when a tweak to stimulus underwhelmed investors and sparked a market selloff. Just three months on, with consumer prices falling again and the outlook worsening, the central bank faces a critical test of its credibility.

“Draghi will not want to disappoint markets again,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. “I struggle to imagine that all the conventional and unconventional measures can – one far day – be unwound smoothly. But the ECB’s more immediate worry is to prevent the risk of deflation from increasing." …

Since he became ECB president in November 2011, Draghi has announced eight interest-rate cuts, two long-term loan programs for banks, and an asset-purchase program that has been both expanded and extended,citing the risk of weak price growth. He’s also introduced forward guidance on rates, eased refinancing operations, and created an emergency bond-buying plan for stressed economies that has never been used.

After all that, inflation is running at minus 0.2 percent, and revised ECB macroeconomic forecasts to be published on Thursday may show the goal of returning consumer price growth to just under 2 percent being pushed further and further out. While a market gauge of inflation expectations jumped last week, the measure has still fallen significantly in recent months. The Sentix economic index for the euro area published on Monday slid for a third month.

In short, as Executive Board member Peter Praet has noted, the credibility of the central bank is at stake.

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