DCSIMG

CBI chief pleads for fresh EU vision as deflation looms

The Euro sign is illuminated in front of the European Central Bank (ECB) in downtown Frankfurt. Picture: AP

The Euro sign is illuminated in front of the European Central Bank (ECB) in downtown Frankfurt. Picture: AP

  • by DOMINIC JEFF
 

THE European Central Bank faces its own D-Day this week with markets gambling on a flood of easy money to tackle chronic economic stagnation that is threatening to push the Eurozone into deflationary ­territory.

While the ECB is widely expected to bring in negative interest rates, in Britain the CBI will lay out its vision of a business friendly EU after recent elections showed that many residents are unhappy with the present format.

Speaking at an event alongside former prime minister Tony Blair tomorrow, CBI director-general John Cridland will call for a more outward-looking union, with less red tape and legislation.

Cridland will say: “Businesses large and small are clear that membership of the EU is in the UK’s national interest. But the status quo won’t do; we cannot waste this window of opportunity with a new parliament and commission this year to achieve a reformed EU.”

Dramatic action to stimulate business by the Eurozone’s central bank is already expected following strong hints that it will slash rates at its June gathering on Thursday – which almost certainly means charging banks to deposit money.

That is regarded as a dangerous manoeuvre that has rarely been tried, and economists say it should be accompanied by measures to incentivise lending or risk having the opposite effect by persuading banks to move their money out of the Eurozone ­altogether.

ECB board member Yves Mersch said last week that the central bank is “working on a broader range of instruments than might even strike the most fertile imagination”, and a failure to act now is likely to bitterly disappoint investors.

The ECB meeting takes place against the background of a painfully slow recovery in the 18 countries that share the euro currency, and inflation below 1 per cent.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “Economic conditions in the Eurozone certainly justify strong action, and if the ECB fails to deliver having built up expectations, it risks upsetting the markets and also denting its credibility,” he said. “There is only so long you talk very dov­ish without delivering.”

The ECB’s decision, which comes after years of relative inaction when compared with its peers in the UK, US and Japan, will coincide with the Bank of England’s monthly policy meeting.

The Bank of England faces the opposite problem, as growth ramps up and inevitably eats away at the “slack” in the economy.

Unlike its counterpart over the channel, the Monetary Policy Committee (MPC) is expected to again hold the UK base rate at 0.5 per cent, although behind closed doors there is likely to be an increasingly lively debate about when it will have to rise.

Archer has brought forward his forecast for the first UK rate rise, from 0.5 per cent to 0.75 per cent, to February 2015, rather than May or June. But he still thinks that the rate will be no higher than 2 per cent by the end of 2016.

Jonathan Loynes, chief European economist at Capital Economics, said: “While the MPC will leave policy on hold again… it is clear that some members are getting closer to voting for higher interest rates.”

But he added that, provided inflation remains low and the bank uses separate tools to take any action needed to cool the housing market, rates “could remain at their current levels until well into next year”.

 

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