Former ECB governing council member Jürgen Stark writes in the Financial Times today and rants about overblown fears of deflation.
He makes some good points and he makes some points I disagree with on the threat of deflation. He also said prices are likely turn higher on their own. “No further action by the ECB is required,” he says.
But his second message is “everyone should stop talking about deflation”.
Is the euro area entering a “lost decade” with a conjunction of low growth and deflation? The discussion sparked by the International Monetary Fund, market participants and media is unsettling … The longer this discussion continues and the more intense it becomes, the more likely the risk of a self-fulfilling prophecy.
Central bankers have become obsessed with expectations and they have the mistaken belief that they can be managed. In Japan, the BOJ continues to forecast +2% inflation in the hope that their forecast will inspire the market.
The problem is that markets aren’t easily fooled. At the same time, central bank credibility suffers when ‘forecasts’ are massaged to manipulate the economy.
In short, if the ECB’s wrong on deflation this time, who is going to trust them next time?