The eurozone escapes deflation: what does this mean for investors?
Last month, the eurozone managed to scramble its way out of deflation for the second time this year. Prices on consumer goods experienced a 0% fluctuation and the monetary union continued to fall short of its 2% inflation goal. Meeting this target is important because if prices continue to go down, consumers may put off spending in the hopes that prices fall further. This delay in consumer consumption – which accounts for about 70% of an economy’s GDP – will hurt economic recovery in the eurozone. So what will the European Central Bank (ECB) do to meet its inflation target and what does this mean for investors?
Quantitative easing (QE)
QE in the eurozone began in January, where the ECB announced a €1.1tn bond-buying scheme (rolled out in €60bn monthly purchases). While QE encouraged lending and investment, it also saw a steady weakening of the euro alongside a season of deflation. This wasn’t completely a result of QE, as falling energy prices also helped keep household costs down.
In order to avoid entering into a season of Japanese-style deflation, the ECB recently announced the possibility of increasing QE in December. In a nutshell, this means boosting the number of euros in circulation to buy assets and keep inflation on target.
Currency effects
Currency depreciation goes hand-in-hand with QE – lower interest rates combined with an increase in the money supply reduce a currency’s relative expected return. However, this also encourages banks to give out more loans and aids investment, boosting economic growth. By contrast, if the eurozone begins to see an increase in consumer spending and borrowing, this could lead to inflation. The ECB may then decide to increase interest rates in order to keep the euro stable.
This highlights the advantages of having your international money transfers guaranteed at a certain rate. The Money Cloud engages trustworthy brokers who will draw up ‘forward contracts’ to safeguard your future online money transfers. This protects you from future market volatility or rising interest rates.
Investment decisions
Changing interest rates can have an effect on investment for both businesses and consumers alike. Lower interest rates in the eurozone may result in reduced borrowing costs, driving demand for loans. For investors looking to purchase a property in eurozone countries, this could mean lower repayment rates should you choose to take out a mortgage in a eurozone country.
The depreciation of the euro has made eurozone exports more competitive. Investors looking to diversify their portfolio could explore the possibility of buying eurozone stocks as the QE stimulus kicks in. However, note that even as their stocks rise, a falling euro will offset any gains you may make. It would be a good idea to speak to one of our brokers to get the best advice on how to make the most of your international investments and money transfer deals.
