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Fear of deflation leads ECB to unconventional steps

The growth of the European economy in the first quarter of this year was quite disappointing. In addition, there is a scarecrow hanging above the old continent is in the form of extremly low inflation. The European Central Bank (ECB) is taking unprecedented measures in an effort to maintain and support the fragile economic growth. Charging a deposit, for example, will encourage banks to offer more loans. ECB hopes that banks will prefer to lend their cash surpluses rather than pay for their storage.

Key to shake the economy and reduce unemployment is to support lending to businesses, which are now in anticipation of lower prices rather postpone investments. Therefore, the ECB cut interest rate to a record 0.15% and now provides the cheapest loans to commercial banks in history.

Measures should also help to combat the negative inflation, which is already for more than a year, far below the two percent threshold, set by the ECB as the optimum price stability. "Concerns that the whole eurozone falls into a deflationary spiral are however somewhat exaggerated. Inflation has reached its bottom and we can expect that thanks to the interventions of the ECB it will grow, although the rate of acceleration is not in any way staggering, "says Aleš Prandstetter, investment strategist at CSOB Asset Management, Inc., an investment company. In the U.S., inflation is indeed already some time moving upward, and from February to May it jumped a full point to 2.1%.

Current interest rates make happy debtors - both households that appreciate the low payments, and firms whose projects have a higher rate of return. In contrast, private investors who put their money into products which are based on holding the bonds until payback are hoping in growth of rates. "Waiting for higher interest rates looks like waiting for Godot. Higher rates still do not come and the cost of money remains low as well as yields of the credit highest quality fixed interest-bearing instruments, "comments Alex Prandstetter. The current policy of the ECB also suggests that the low level of interest rates will be a reality for much longer.

The European economy is slowly bouncing back. What helps is improved business and consumer confidence and renewal of Asian exports. The overall recovery is still far away. In the longer time, there is a long-term, but somewhat neglected factor that could harm the economy. Demographic developments in Europe portends a decline in population, as is the case in Japan. Positive population growth is generating additional demand, on which is economic growth dependent, but also inflation. "If this, not a single one, but quite important motor fails for a long time, then the Japanese stagnation with high standards of living and in an environment with low inflation and interest is not completely unlikely scenario," says Aleš Prandstetter.