Market Commentary: Inflation is ECB's primary target

All eyes will be on ECB President Mario Draghi today as the European Central Bank is expected to be the first central bank to experiment with negative interest rates. Inflation in the euro area slowed to 0.5 percent in May, the lowest in more than four years.

Market participant continue to expect lower inflation rates signalling alarm on the European recovery. Slowing market prices are an indicator or slowing sales. Furthermore expectations of deflation often lead consumers to postpone purchases resulting in recessionary spiral. 

The ECB's primary and only target is inflation. The ECB’s inflation target is 2 percent year on year which; high enough to allow action to avoid deflation and low enough to protect consumers. However, with most EU governments facing budgetary concerns and pressure from an increasingly dissatisfied population, the ECB is increasingly delving in growth and stability territory.
 
Unfortunately market expectations have exceeded Draghi’s “Comfortable with some form of action” speech. A symbolic rate cut from the current 0.25 percent to 0.10 percent and cutting its deposit rate to negative from zero are seen as ‘basic action’ and probably will not quell calls for more radical measures such as quantitative easing. This may lead to disappointment and a sell-off in financial markets as asset price has probably exceeded the ‘basic’ scenario.
 
Economic stability will depend on investors and consumers being confident of economic stability. Lowering lending rates provides and incentive for investors to borrow money.

However, investors will still be unwilling to risk taking loans if they are not confident that their business will grow and survive. Thus the relative failure of central bank action to spark growth as central banks can only influence the supply of credit but are unable to influence the demand side.
 
This morning European Stocks were little changed, with most indices trading near all-time highs. U.S. index futures and Asian Shares were also little changed.
 
Amazon is planning to introduce a smartphone to compete with Apple later this month. Amazon already successfully retails tablets in the form of the Kindle. However, the Kindle is a budget offering compared to the iPad. A smartphone would give Amazon a wider platform for its global retail sales service.
 
German factory orders rebounded from April’s plunge signalling that growth in Europe’s largest economy remains on track.

British house prices spiked 3.9 percent higher in May breaking 2 months of falls and leaving house prices in the three months to May 8.7% higher than a year earlier.
 
The G7 nations threatened on Wednesday to impose harder-hitting sanctions on Russia if it does not help restore stability to eastern Ukraine. For the time being G7 Leaders spared Russia further sanctions in favour of diplomatic efforts.

This article was issued by Calamatta Cuschieri, visit www.cc.com.mt for more information.

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