Mario Draghi making the case for more stimulus to combat disinflation in Europe:
The risk cannot be ruled out completely, but it is limited. The important thing is what inflation rate people expect over the medium term. Since June, we have seen that these expectations have declined. If inflation remains low for a long time, people might expect prices to fall even further and postpone their spending. We are not there yet. But we need to tackle this risk.
History shows that falling prices can be as damaging to the prosperity and stability of our countries as high inflation. That is why our mandate is symmetric. And that is why we are now ensuring that the risk of deflation you just asked me about does not materialise. You, as a journalist, also have a duty to explain. Public opinion in Germany is very important for us.
Note that this interview was given to a German financial newspaper. German officials are perhaps Draghi’s biggest opponent in the fight for more stimulus.
Reuters is reporting that the Bundesbank head Jens Weidmann is skeptical of further QE in the Eurozone, even if the inflation rate drops below zero. In his own words:
Against the background of the rather moderate and uncertain impact as well as the risks and side effects and the not clearly given necessity at the current point in time, I am currently sceptical of a broad-based QE programme. … Substantial volumes would be needed to achieve a moderate and moreover uncertain impact.
This is especially interesting in light of a survey released yesterday showing that 90 percent of respondents in a Bloomberg survey predict the ECB will restart QE next year. This is up from 57 percent the previous month, before oil’s price collapse had become so drastic.
Draghi and Weidmann have sparred for quite some time over the need for more easing. Weidmann’s conservative stance arguably represents the popular opinion among Germans, whose economy has not suffered as deeply as smaller European economies. But Draghi seems to have won this bout—the possibility of a new round of easing has already lured investors into European equities, which would make squashing these expectations a nightmare for already-ailing European markets.
On a related note, here’s a post by Scott Sumner on the ECB. He asks whether the ECB is a hopeless case. He stops short of answering the question outright, but I think we can see where this is all headed.