Eurozone and Britain heading in different directions

Olli Rehn, Vice-President of the European Commission in charge of Economic and Monetary Affairs and the Euro, gave a Press conference on the Union’s economic forecasts for 2012-2013. (EC Audiovisual Services).

Olli Rehn, Vice-President of the European Commission in charge of Economic and Monetary Affairs and the Euro, gave a Press conference on the Union’s economic forecasts for 2012-2013. (EC Audiovisual Services).

Eurostat, the EU statistical service, confirmed yesterday that its ‘flash estimate’ of September inflation at 1.1% is correct. In a brief Press release, the Service announced that, “Euro area annual inflation was 1.1% in September 2013, down from 1.3% in August. A year earlier the rate was 2.6%. Monthly inflation was 0.5% in September 2013”. Eurozone’s inflation has being falling fast. Within three months it fell from 1.6% in July to 1.1% in September.

According to the same source in September 2013, the lowest annual rates were observed in Bulgaria (-1.3%), Greece (-1.0%) and Latvia (-0.4%), and the highest in the United Kingdom (2.7%), Estonia (2.6%) and the Netherlands (2.4%). Compared with August 2013, annual inflation fell in seventeen Member States, remained stable in eight and rose in three. The negative readings for Greece and Bulgaria were expected due to the deep recession both countries are in, but the 2.7% inflation rate for Britain appears on the high side.

Britain in danger of more inflation

Actually, Britain is in completely different economic conjuncture than the rest of the European Union. The Bank of England has embarked in a super relaxed monetary operation designed to keep interest rates low. Its ultimate targets are not monetary though, and are aimed at more growth and less unemployment, without paying much attention to the inflationary repercussions this policy may have. Many analysts fear that this may soon lead to capital outflows from the sterling in anticipation of an inflation spiral.
The new governor of the Bank of England, Mark Carney, has repeatedly confirmed that the central bank of Britain is not to raise its basic interest rate from the currently very low-level of 0.5%, “until the Labour Force Survey headline measure of the unemployment rate has fallen to 7%”. In this way BoE has set an economic policy target, which doesn’t belong to its sphere of monetary mandate.

The question is whether the BoE will be able to maintain capital market interest rates at their current very low levels of 0.5% and at the same time avoid a capital outflow from the sterling. It may soon be confronted with renewed inflation pressures and a fast falling foreign value of the currency, feeding further price increases. In any case Britain enjoys a more robust growth that Eurozone and the BoE wants to strengthen it.

In continental Europe the conjuncture is almost the opposite. Fast falling inflation has not yet prompted the European Central Bank to cut further its interest rates. However, ECB’s President Mario Draghi, has left this possibility open for the next meeting of the bank’s Governing Council at the beginning of November. The obvious target is to support growth.

Eurozone risks more recession

Eurozone’s problem is now its very low, fragile and uneven growth recorded during the past few months in the 17 member states. After three consecutive years of recession, the 0.3% increase of GDP during the second quarter of 2013 may easily return to the south part of the graph, threatening in this way to send euro area in a disinflation and a zero or negative growth vicious cycle.

In this respect Eurostat’s confirmation of September’s inflation at 1.1% is not a good sign. ECB says that its inflation target is at below 2% but not much way from this benchmark. By any measure, the 1.1% is far below the target. Concerning monetary policy, ECB applies almost the same super relaxed policy tools as the BoE, in a completely different economic conjuncture though. As a result, while Britain runs the risk of an inflation spiral, Eurozone may end up in a disinflation and negative growth vicious cycle.

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: