European Central Bank sees increased risk to inflation goal: Praet

“Developments in the world economy and commodity markets have increased the downside risk in achieving the sustainable inflation path towards 2%; the risk has increased”, he told reports, according to Reuters.

Analysts said that Mr Praet’s comments suggest the ECB will cut its forecast for inflation when it meets next week, and raise the chances that the central bank will at some point ramp up its quantitative easing program.

“There should be no ambiguity on the willingness and ability of the governing council to act if needed”, Praet, said.

Ian Quigley, director of investment strategy at specialist bank Investec, said the global economy has sufficient momentum to withstand the likely impact of a China slowdown.

Annual inflation in the eurozone was 0.2 per cent last month, far below the ECB’s target of just below 2 per cent over the medium term.

Crude oil prices (LCOc1) have fallen close to 40 percent since May while iron ore price are near historic lows on expectations that Chinese growth will continue to slow, hitting its lowest level in two decades.

Markets see deflation in a year.

The pan-European FTSEurofirst 300 index (.FTEU3) pared losses of almost 3 percent on Praet’s comments, later trading down around 0.8 percent.

What this probably means is that the European Central Bank will bring forward some of its planned spending – maybe 80 billion euros a month – and/or make a stronger pledge to keep going after the current programme is due to end around September 2016. Inflation is not going anywhere, expect maybe down.

Mr Praet added that the path of commodity prices, as well as a widening output gap in emerging markets, had influenced his assessment.

The argument is that if markets trusted policy makers more, then they would be betting on them to deliver faster inflation – which was the aim of zero interest rates and bond-buying – and so-called real rates would decline, easing financial conditions.