This morning an article in the New York Times said that financial markets are betting that the threat of deflation in the euro zone has all but evaporated, calling into doubt forecasts that benchmark German government bond yields could drop to zero or even below. (link here). This article list several reasons as to why the deflation in the Eurozone has disappeared and that inflation will begin to take over the area. "Short-term inflation expectations have picked up as the euro zone economy has shown signs of gradual improvement, including the first expansion in private lending in three years." "Deflationary risks have definitely receded," said Martin van Vliet, senior rate strategist at ING. Although there is positive signs of the Eurozone improving, this is this article also shows some doubts about all the positivity.
The author states:
the bounce in short-term expectations is bringing into question a long-held view that ECB purchases would keep pushing yields lower, potentially turning Bund yields negative.
It is too early to conclude that Bund yields will never reach zero. That would require sustained economic recovery.Many euro zone countries have debts bigger than their economies, making it hard for governments to support the recovery. Greece's future in the euro zone is still in doubt.And short-term inflation expectations depend significantly on oil price moves. That leaves some seeing the recent moves as short-lived.
What are your thoughts? Do you think think the short-term inflation has picked up and will reduce the deflation in the region or is it too early to see what will happen?
It's impossible to call it out with 100% certainty, of course, but I doubt deflation will seriously manifest throughout the Eurozone. I also doubt that inflation has returned to normal or stable levels, however, it seems the ECB has stopped the recessionary period and is slowing crawling its way into normal and sustainable inflation.
ReplyDeleteYeah I agree, the recent data shows the Eurozone slowly making progress by fighting deflation with monetary tools and creating some level of short-term inflation. However, the real concern is, is there enough sustainable growth happening that would deteriorate deflation from the region in the long-run?
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