ECB likely to soften stance but refrain from action

The fall in euro-zone CPI inflation to a four year low of 0.7% has raised the prospect of a bout of outright deflation in the euro-zone economy. While cost pressures are not as weak as they were when the currency union last saw falling prices in 2009, measures of spare capacity certainly suggest that inflation could fall further and perhaps turn negative. Indeed, several of the peripheral economies are already in or very close to deflation, hindering their efforts to prevent their debt ratios from rising further.