Sterling has fallen below 1.23 against the Euro today which is a little surprising considering inflation figures fell from 0.7% to 0.5% year on year. As a result most analysts expect the ECB to try and counteract the current falling inflation figures through a cut in the base rate. Indeed it has been the threat of deflationary pressure that has hampered the Euro in the past few weeks.
Some of the major problems with deflation can be the lack of consumer spending as the general public expects prices to continue to fall and this in turn can increase the real value of money and the real value of debt. Deflation therefore makes it more difficult for debtors to pay off their debts. For this reason consumers and firms have to spend a bigger percentage of disposable income on meeting debt repayments.
It is widely expected that the ECB will have no choice but to act on Thursday and it is this that should, in theory, devalue the Euro. However some would argue by the ECB showing a willingness to act could indeed be seen as a positive for the Euro and this means Thursday is set to be a particularly volatile day.
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