From Coppola Comment:
Consumer price inflation in the Eurozone has been below the target of 2% and falling for quite some time. But until now, the ECB has been sitting on its hands. Inflation some distance below target didn't appear to bother it - most likely because the (unbelievable) forecasts for Eurozone recovery created inflation expectations in the 1.5 - 2% range, so it saw no need to act on what was assumed to be a temporary problem.
So why did the ECB, in a complete reversal of its previous stance, suddenly cut the refi rate to 0.25%? Well, Eurozone consumer price inflation has touched a record low of 0.7%, driven by falling energy prices and stagnant prices in other sectors. But inflation expectations are still where they were before, based on expectation of a strong Eurozone recovery.
Here is a Eurostat chart showing Eurozone inflation rates by country as of September 2013:
And Reuters reports that German inflation has unexpectedly fallen to 1.2% in October. Well, well. German inflation is below target and falling. So the ECB is doing what the ECB does - responding to German monetary indicators. I suppose this is inevitable, since Germany is the dominant economy in the Eurozone. But it just shows how impossible a one-size-fits-all monetary policy really is where there are such disparities of size and competitiveness between countries in a monetary union. Monetary policy is inevitably driven by the needs of the largest, even if it is actually damaging to the smallest....MUCH MORE
