Posted by: Dirk | November 19, 2013

Asmussen still optimistic about euro zone inflation

As Reuters reports, European Central Bank Executive Board member Jörg Asmussen is still optimistic that the ECB can cause inflation to rise:

“If the situation in inflation requires it, we can act again and one of the possible measures would be to (introduce a) … negative deposit rate,” Asmussen told Austrian broadcaster ORF. He would be “very, very careful” in deploying this tool but did not want to rule it out completely.

I have the feeling that Asmussen uses the deposit rate on purpose, even though normally central banker speak of main refinancing rates. So, it seems to me that he thinks that negative interest rates would lead to more consumption. This idea has been disputed by lots of research: consumption depends on income, not interest rates. A look at the euro zone will show you the idea: consumption rates are very different across countries that face the same low interest rate. Spaniards consumed a lot, while their incomes were high and interest rates relatively high also. With low interest rates and low income they chose not to consume as much. While a central banker probably has to give the impression that the central bank is in control, I strongly recommend policy makers to look for a plan B.

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