There is a strong argument for Mario Draghi to sit on his hands and do nothing. The boss of the European Central Bank (ECB) may have failed earlier this year to slay the dragon of deflation when he launched €60bn (£43bn) a month of quantitative easing, but his policy worked to some degree and in any case, his weapons are ineffectual for now .
The City loves cheap credit and is cheering on Draghi to cut interest rates or boost the QE programme, based on the time-honoured theory that central bankers with loose monetary policies can prevent their economies slipping into negative inflation.
Such a move would increase the supply of money inside the single currency bloc and supposedly add to the pressure on prices. Inflation would stabilise. Deflation killed.
When eurozone prices slipped back 0.1% last month, the clamour from investors intensified. And when it seemed as if Draghi was amenable, stock markets jumped. They obliged again on Thursday with the German Dax soaring by more than 250 points, or 2.5%.
Except that the ECB has little firepower left. Inflation is low because oil prices have collapsed since last year. If anything, this is a good thing for consumers and businesses that have more disposable income.
To a great extent, the direction of oil prices lies in the hands of US frackers. If they declare their wells uneconomic at $50 (£32) a barrel and shut them down, supply will fall and prices rise. If they continue pumping, prices will stay low.
As for pumping money into the eurozone economy, that task is being taken up by the Spanish and Italian governments.
In the past few weeks, Rome and Madrid have submitted budgets to spend more than the EU commission considers prudent. It is this cash that will boost spending over the next year more than an extra €10bn from the ECB.
And yet Draghi just might press the button. He might even push down the already negative deposit rate – the one that effectively charges banks to park money with the ECB – if only because he cares about the exchange rate, which is threatening to choke off the eurozone recovery.
The euro has recently approached $1.15 compared with its near 12-year low of $1.0457 in March. That’s a big burden for Italian and German exporting manufacturers to carry at a time when China is slowing and world trade contracting.
Draghi will always deny the ECB has an exchange-rate target. Yet he did acknowledge the significance of the exchange rate to growth and the risk that, without further action, the euro will carry on rising.
