Nowotny eyes ‘self-correction’ of low inflation

Low euro zone inflation and the strong euro could both start to self-correct this year without requiring any action from the European Central Bank, one of its policymakers Ewald Nowotny has said.

The Austrian central bank chief did, however, back plans to keep the banking system topped up with cheap funding.

The ECB meets next month armed with new staff forecasts that for the first time will stretch out as far as 2016.

Economists expect them to show inflation, currently running at just 0.7 per cent, staying well below the bank’s preferred level of just under 2 per cent all the way out.

“One could expect that if the real economy is getting up and if we see that in Germany wage increases are quite substantial, there might be a certain self-correcting trend (in inflation),” Mr Nowotny said in an interview with Reuters.

“So we will see whether this needs some specific action or whether ... there would be a merit for waiting.”

Some German workers, backed by powerful unions, are calling for wage increases of more than 5 per cent this year although they have generally settled for less after negotiating.

Europe did have advantages over countries like Japan where falling prices became entrenched for years.

“Fortunately we do not have a deflationary psychology in Europe. I’m pretty sure this will not be a longer-term trend because I think this is due to very special circumstances,” Mr Nowotny said.

One of the additional downward pressures on inflation has been this year’s strengthening of the euro against a backdrop of emerging market turbulence which is making imports as well as key energy costs cheaper.

Mr Nowotny said that could also reverse of its own accord, adding that the bank would not in any case resort to currency market intervention.

“Again I’m not sure whether this might not be a case for some self-correcting market movements. I could imagine a situation where during this year there are some forces that could lead to an appreciation of the dollar again.”

Reuters