Euro-zone negative deposit rate possible in March as deflation

16

While deflation in the euro-zone is denied by the ECB, it is certainly on the table. ECB members are getting busier discussing this option, and they are accompanied by other bodies. The IMF just chimed in by saying there is a 10-20% chance for 2014.

To fight deflation, the euro-zone needs more economic activity: more euros in circulation and a weaker value of the euro to boost exports. This can be triggered by setting a negative deposit rate. It seems that the ECB just needs another small push. Can it happen in the March meeting?

Update: January sees a fresh drop of CPI to 0.7%. Some analysts see a February cut, while here we stick to March.

While Draghi denied that there is a risk of deflation but just low inflation for longer, he recently said that deflation in some states requires adjustments. Is he preparing us for the move?

Falling inflation

Words matter, and so do numbers. The most recent core inflation figure in the euro-zone was confirmed at 0.7%, below the October value of 0.8% that triggered the rate cut in November. However, headline CPI was slightly higher in December than in October: 0.8% vs. 0.7%.

Germany, the core of the core, saw HICP inflation dropping unexpectedly to 1.2% and recently PPI fell short by rising only 0.1%. The next figures are German flash CPI for January on January 30th, and the all-European number on the 31st.

What’s needed for the move?

A fall to new multi-year lows of 0.6% in either CPI or Core CPI in the euro-zone might be needed for a new policy change from the central bank. Even if the current trend continues into January and these indices reach 0.6%, it might be too early for Draghi and his colleagues to move in the upcoming meeting on February 6th.

Nevertheless, by March 6th, the numbers could worsen and the markets could be ready for a move. A negative deposit rate doesn’t need to be at deep freeze territory: -0.1% will do. A symbolic move to discourage banks from parking their funds with the ECB could send money away from Europe and weaken the euro.

What do you think? Will they or won’t they?

For more on the euro, see the EURUSD forecast.

Get the 5 most predictable currency pairs

About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

16 Comments

  1. Pingback: Euro-zone negative deposit rate possible in March as deflation debate is high on the agenda - James Invest | James Invest

  2. Pingback: EUR/USD January 24 – holds on to high ground … | Forex

  3. Pingback: EUR/USD: Trading the US Advance GDP | Forex Crunch

  4. Pingback: EUR/USD Jan. 28 – Slight Losses Ahead of Key US Numbers | Forex Crunch

  5. Pingback: EUR/USD Jan. 29 – Steady As German Consumer Climate Jumps | Forex Crunch

  6. Pingback: German inflation softer than expected – EUR/USD drops | Forex Crunch

  7. Pingback: EUR/USD Jan. 30 – Lower As Fed Tapers QE | Forex Crunch

  8. Pingback: Euro-zone inflation falls to 0.7% – EUR/USD falls | Forex Crunch

  9. Pingback: Euro-zone inflation falls to 0.7% – EUR/USD follows | Signals News

  10. Pingback: EUR/USD Jan. 31 falls to low support on weak euro-zone data | Forex Crunch

  11. Pingback: EUR/USD Forecast February 3-7 | Forex Crunch

  12. EL @ Moneywatch101 on

    Good information for explaining the current status of the Euro. Any country will do all it can to protect the status of their currency.

  13. Pingback: EUR/USD Forecast February 3-7 | Forex Crunch | Forex

  14. Pingback: ECB Preview: 5 scenarios – negative deposit rate now, or later? | Forex Crunch

  15. Pingback: EUR/USD: Trading the US Non-Farm Employment Change | Forex Crunch

  16. Pingback: EUR/USD falls 80+ pips and loses uptrend support after another talk of negative rates | Forex Crunch