Following months of speculation, the eurozone is seeing a fall in consumer prices, a development that’s likely to reinforce expectations that the ECB will soon provide an aggressive monetary stimulus. The dramatic drop in oil prices is the main reason for the fall in prices in the eurozone. A fall in prices is a concern for policymakers if it is sustained over a period of time, a situation often referred to as a ‘deflationary spiral.’ The ECB is increasingly concerned about such a scenario because the eurozone has failed to generate much growth since the recession ended in mid-2013. As a result, many in the markets think the ECB will back a government bond-buying program. The stimulus would create new money. Traders are selling the currency on the prospect of more euros in circulation. The ECB’s policymaking governing council meets on January 22 and many investors think that a bond-buying program, which is often referred to as ‘quantitative easing,’ will be announced then.
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