Relentlessly falling inflation is bad news for Eurozone banks. It increases the real (inflation-adjusted) value of borrower debt and the real cost of servicing that debt. It causes loan defaults, and therefore bank loan losses, to rise.
So with Eurozone inflation, currently at a near-record low of 0.4%, clearly at risk of heading into deflationary territory, what did the ECB say was the “adverse scenario” for this year? Inflation of 1% – more than twice its current level. This is indefensible; the ECB’s dire scenario for this year is actually much cheerier than the IMF’s baseline forecast, which pegs inflation at 0.5%. The country-by-country comparison is shown in the graphic above. Read more »