Courtesy of Mish.
This morning, ECB president Mario Draghi Held Rates at 0.25%, while rejecting fears of deflation.
ECB president Mario Draghi said: “We have to dispense with this idea of deflation. The question is – is there deflation? The answer is no.”
Eurozone inflation slowed to 0.7% in January from 0.8% in December.
In addition to holding its benchmark rate at 0.25%, the ECB also left the rate it pays on bank deposits unchanged at zero.
At a press conference to explain the ECB’s latest decision, Mr Draghi said: “There is going to be a low level of inflation for a protracted period of time, but deflation? No.
“The modest recovery is showing encouraging signs. The demand side is getting stronger, not weaker. We have to treat the recovery with extreme caution. It is very fragile. It is starting from very low levels but it is proceeding.”
“Dangerous Game of Chicken”
It did not take long for monetarists to respond. Ambrose Evans-Pritchard quickly whined “Insular ECB is playing dangerous game of chicken with deflationary world forces“.
The US and China are withdrawing stimulus on purpose. The eurozone is doing so by accident, letting market forces drain liquidity from the financial system for month after month.
The balance sheet of the European Central Bank has fallen by €553bn over the past year as banks repay money that they no longer want, either because ECB funds are too costly in a near-deflationary world or because lenders are being compelled by regulators to shrink their books.
This is “passive tightening” or “endogenous tapering”. The ECB balance sheet has plummeted to 23pc of eurozone GDP from a peak of 32pc in July 2012.
Hardliners will be delighted to learn that we now have synchronized G3 global tightening at last, further compounded by enforced tightening in Brazil, India, Turkey, South Africa and a string of emerging market states trying to defend their currencies. At least two-thirds of the global economy is turning down the liquidity spigot.
Retail sales fell 1.6pc in December, the biggest drop for two-and-a-half years. The unemployment rate has stabilised at 12pc, but only because so many people have dropped off the rolls or fled abroad. Italy has lost a further 425,000 jobs over the past year.
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