Euro area inflation has long been below the European Central Bank’s objective for price stability and has continued to slow in recent months. This has given rise to heightened concerns that the euro area could soon be facing a prolonged period of deflation, as recently in Japan.
The decision by the ECB Governing Council to ease monetary policy through an expanded asset purchase programme will boost demand and accelerate inflation via a number of different channels.
The Russian economy has begun to contract due to the fall in the price of oil. GDP will contract by over 4% in 2015. The uncertainty will cause a decline in investment, and consumption will be cut particularly by rapid inflation. Imports will be reduced by the contracting economy, a weak rouble and declining export income.
Central banks have acted forcefully to provide monetary accommodation. With little room for manoeuvre for standard interest rate policy, unconventional measures have been adopted.
As a result of the prolonged period of exceptionally weak price developments, the ECB’s price stability objective began to lose its role as a solid anchor to price formation in the euro area.
