FOREX-Dollar rises as December Fed rate hike still seen possible

16 Oct 2015 | Author: | No comments yet »

Here comes more QE in Europe as ECB combats deflation.

The European Central Bank’s aggressive quantitative-easing program hasn’t even been around to mark its first birthday and already pressure is mounting on the policy makers to announce more stimulus.

With the closely watched ECB meeting coming up next week, investors are now speculating about when the central bank will make a further stimulus move, rather than if such a move could happen. That notion was hammered home this week when data confirmed the eurozone has slipped back into negative inflation, which is bad news for both the ECB and the region’s growth prospects.

The central bank’s primary mandate is to ensure price stability throughout the currency bloc and that means targeting inflation rate of close to, but below 2%. Inflation presently stands at negative 0.1%. “Renewed eurozone deflation in September heaps pressure on the ECB to step up its stimulative action at its 22 October policy meeting,” said Howard Archer, chief U.K. and European economist at IHS Global Insight, in a note. “Further ECB action would be most likely to be through increasing and/or extending of its quantitative-easing program. [ECB President] Mario Draghi has repeatedly stated that interest rates have reached their lower bound,” he added. Several central-bank officials have stated that it is too early to fully judge whether more easing is needed or if the already-announced €1.1 trillion bond-buying program is doing the trick. Executive board member Yves Mersch noted earlier this week that “amid the renewed decline in headline inflation, we have to be mindful whether there could be second-round effects stemming from the decline in oil prices, or if there is an overestimation in the assessment of the Chinese situation.” Low oil prices CLX5, +1.88% which have declined more than 50% since their highs in the summer of 2014, are seen as the main culprit behind undesirably low inflation levels in most part of the developed world.

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