Croatian National Bank Governor Says ECB Should Not Overreact To Inflation Going Down

Croatian National Bank governor, Boris Vujcic has said that European Central Bank should not overreact to inflation going down below its target level. In an interview given to Reuters, he said that low inflation is always better than high inflation.

ECB Cut Down Interest Rate Again Last Week

The European Central Bank (ECB) cut down interest rate again last Thursday. This time it cut it by 25 basis points or 0.25%. The benchmark interest rate was reduced from 2.25% to 2%. This is the 8th interest rate cut by the ECB in this year. ECB is cutting interest rates in order to give a boost to the slowing Euro zone economy.

The Concern Of Inflation Rate Being Too Low

There is still the concern that Euro zone inflation rate is too low and it may slip further into deflation. Deflation means negative inflation i.e. prices falling down instead of going up. Target inflation rate of ECB is 2%. Inflation rate in May in Euro zone countries stood at 1.9%. The ECB expects inflation in the Euro zone to fall down further to 1.6% over the next year.

According to Vujcic, inflation rate will pick up after energy prices bottom out and start rising. He also said that as Euro zone economy picks up, inflation rate will also pick up.

Deflation A Risk 

Deflation is also considered to be a risk for an economy. An extended deflation due to weak demand may hurt businesses as prices continue to fall. Both consumption and expenditure tend to go down during times of extended deflation. A low and stable positive rate of inflation is considered to be best for the economy.

Vujcic also said that the ECB should not be worried too much about the exchange rate of Euro and its impact on inflation rate. In the past one year, the Euro has appreciated by more than 5% against the US dollar. This appreciation has made imports into Euro zone cheaper. This in turn has also put downward pressure on inflation rate in the economy.

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Source: European Central Bank