Slowing inflation is giving central bankers scope to provide the world economy with more liquidity and lower interest rates for longer, all in the name of price stability.
European Central Bank President Mario Draghi may cut his benchmark rate to a record low as soon as this week as ebbing price pressures let him deliver more stimulus to the euro area’s recession-riddled economy. Federal Reserve Chairman Ben S. Bernanke at a policy meeting that starts tomorrow might have more room to press on with asset purchases as the argument against that strategy is undercut by waning inflation risks. Their counterparts from New Zealand to Canada also have more reason to keep policy loose.The odds of disinflation are mounting as the world economy slows anew and commodity prices slide, defying forecasts that easy money would trigger an acceleration of prices. More than half of the world economy, including the U.S. and the euro area, instead confronts inflation below the central banks’ desired levels, according to Ethan Harris, co-head of global economics research at Bank of America Corp. in New York.
“There is a developing inflation problem: undesirably low inflation,” said Harris, a former Federal Reserve Bank of New York economist. “For central banks, this increases the pressure to maintain super-easy monetary policy.”Deflation Danger