The sharp decline in inflation in the euro area to only 0.7 per cent in October has focused attention squarely on the monetary strategy of the ECB, ahead of its policy meeting next Thursday. In 2012, the Governing Council was willing to introduce very unconventional measures in order to keep the single currency together, dampen crises in sovereign debt and repair the fragmentation of interest rates between member states. Most people now concede that, without these measures, the eurozone would have fallen apart.
The startling success of this action has tended to shift attention away from more mundane matters, such as the overall stance of monetary conditions for the euro area as a whole. But the recent decline in inflation has raised serious questions about whether the monetary stance is anywhere near appropriate for an economy in such a depressed state.
This is problematic for the ECB, since it has already fired almost all of the conventional monetary ammunition available to it. And it has never followed the example of other major central banks in considering that quantitative easing is needed to ease policy at the zero lower bound for interest rates. It may soon have to face up to this issue.