European Central Bank- 3 arrows for deflation

The European Central Bank today has no choice but to inject money in the Eurozone as its long deflationary state will consequently harm the 19-nations.

However, out of the three measures it announced, two are likely going to impact on the weakest economies defeating the purpose of this exercise.

Currently, it’s no longer a matter of what measures will be taken but when will they be introduced as consumer prices for December fell drastically.

Also, this deflationary period cannot be stretched further and measures towards economic growth need to be sought out quickly.

It is expected that ECB’s President Mario Draghi will consider government bond-buying as a strategy by printing money and distributing it on a large scale.

However this can only be confirmed after the Government Council’s policy meeting to be held on January 22.

The ECB might find itself constrained to launch Quantitative Easing (QE) as an option but on a more selective basis, giving each euro state its fair share.

The second suggestion is that Central banks buy government debts limiting risks within their own territory.

The third suggestion opts for the ECB buying triple-A rated bonds and relying on investors to bring in more input from their side.

Many economists believe that the second and third suggestions would rebound as the ECB earlier retracted from buying Greek, Italian, Spanish and Portuguese debt and encouraging investors to do so would be illogical.

Source: Reuters

Priscilla Camryn By: Priscilla Camryn