The euro is trading at a 9 year low against the dollar on Wednesday just ahead of the release of a closely watched euro area inflation report for December that will be released later in the day and likely determine if the European Central Bank (ECB) is set to launch additional monetary stimulus in the economies of the 19 countries using the euro as currency to help reduce the risk of deflation and stimulate economic growth.
The main objective of the ECB’s monetary policy is to maintain price stability.
The ECB seeks to have inflation rates of below, but close to, 2 percent over the medium term.
Inflation in the 19 member euro area is nowhere near 2 percent and fell to 0.3 percent in November, touching a five year low, and highlighting the reality of declining prices led by oil ‘s large price slide along with weak economic growth.
A year earlier the inflation rate was 0.9 percent.
The euro area inflation forecast for December is lower at 0.1 percent.
Before the recent tumble in oil prices, the ECB reported that they expect inflation for 2015 to reach 0.7 percent which will likely be revised lower.
The ECB has engaged in monetary stimulus efforts by keeping interest rates at historic lows and offering long term refinancing operations to banks.
After keeping its benchmark interest rate at a record low of 0.05 percent since September 2014 and introducing negative overnight deposit rates of -0.20, the European Central Bank (ECB) has attempted to provide the necessary monetary groundwork to help spur lending across the 19 member euro area.
But those monetary stimulus efforts have fallen short of reviving growth and the 19 member euro area still faces the threat of deflation along with weak GDP growth.
ECB President Mario Draghi announced recently that the ECB could add even more monetary stimulus in early 2015 to help generate economic growth by launching a € 1 trillion U.S. style quantitative easing program through purchasing government bonds-sovereign debt from the 19 countries making up the euro area.
The ECB Council will meet again on January 22nd to set monetary policy and decide if they are ready to provide more monetary stimulus.
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