Flash: A deflationary scenario not likely in EMU – BTMU

FXstreet.com (Barcelona) - Lee Hardman, FX Analyst at the Bank of Tokyo Mitsubishi UFJ notes that Bank of France Governor Noyer was speaking alongside BoJ Governor Kuroda overnight and stated that he doesn’t want overall inflation in the euro-zone to become too low which would increase the risk of getting too close to deflation.

Key Quotes

“He also noted that the ECB through their recent refi rate cut had to boost the safety margin so inflation in the medium-term doesn’t near 1.0%, while he wants inflation back towards 2.0% before weighing policy potential tightening.”

“ECB Executive Board member Coeure also spoke overnight and emphasized that the ECB’s recent decision to lower the refi rate “was motivated by a disinflation in slow motion” which is expected to “extend into the medium-term”.”

“The decision was not taken “because we see deflation risks materializing in the euro-zone”. Similarly to comments from Bank of France Governor Noyer, ECB Executive Board member Coeure noted that “we wanted to keep a sufficient safety margin above 0% inflation”.”

“Overall the comments suggest that the ECB will likely remain sensitive should inflation continue to disappoint given that it is already uncomfortably below target.”

“Further easing will likely be required to weaken the euro with the recent refi cut having little impact upon the euro while the EONIA rate is drifting higher as liquidity tightens. It has encouraged a modest rebuilding of speculative euro short positions which reached their highest level since late July.”

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