ECB Vice President on inflation - deflation | UK GDP first estimates today

There was a thought-provoking intervention by Vitor Constancio, the Vice President, at last Thursday’s press conference following the European Central Bank’s monetary policy statement in Malta. Mr. Constancio is something of an expert on inflation and its not-so-desirable counterpart, deflation.

We have extracted the part of the press conference where these wise words were uttered and put them up on YouTube. You can access them by clicking here to listen to the man himself, but the essence of what he had to say is summed up by an emphasis on debt and the real, inflation adjusted interest rates which dictate how this debt is serviced. There is also the fact that when inflation goes negative, wages and salaries increase in real terms because there is an inbuilt opposition to a reduction in take-home pay. This diminishes competitiveness in industry. And then there is the old problem of negative inflation motivating individuals and businesses to postpone purchases. Who is going to buy and new fridge when they know that they can get it cheaper in the future?

The focus on debt is interesting. Member states of the Eurozone, and their private citizens, now have perhaps more debt than they ever had. The only positive here is that core interest rates are low, but obviously this debt is of major concern to the central bank.

UK GDP first estimates today

Certain leading indicators of the strength of the UK economy, such as strong retail sales and industrial production, point to the possibility that the release of the first estimate Gross Domestic Product figures by the Office of National Statistics (ONS) later today will show growth this time round. 

Such an eventuality is bound to increase the probability that the Monetary Policy Committee of the Bank of England will be motivated to raise interest rates sooner rather than later. This, of course, would be a positive for Cable, as the British pound against the US dollar is known in Forex circles.