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Deflation knocks at ECB door, markets look for cash

FRANKFURT, Germany -- Financial markets are looking to the European Central Bank to open the cash floodgates next week after consumer price data showed the 18-country eurozone is flirting with deflation, analysts said.

Speculation is rising that the ECB's decision-making governing council could signal plans for what is known as “quantitative easing” or “QE” at its regular monthly meeting on Thursday.

This is a radical policy — already used by other central banks such as the U.S. Federal Reserve — of buying securities on a big scale to inject cash into the economy.

The ECB has already cut its key interest rates to record lows and made huge volumes of ultra-cheap cash available to banks in a bid to kick-start lending in the singe currency area.

But the pressure has increased on the ECB to take still more measures after eurozone inflation slowed to a paltry 0.3 percent in August from 0.4 percent the previous month.

That is worryingly below the central bank's target of just under 2.0 percent and brings the single currency area perilously close to deflation, a climate of falling prices which can cause businesses and consumers to delay purchases, further reducing demand and prices and pushing up unemployment.

Analysts said they were convinced that the ECB is now planning QE after its president Mario Draghi said recently that the bank is becoming concerned about falling inflation expectations.

The ECB as “ready to adjust (its) policy stance further” and “will use all available instruments needed to ensure price stability over the medium term,” Draghi said.

The remarks sparked a rally on European financial markets early last week.

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The Euro logo in front of the European Central Bank in Frankfurt am Main, western Germany on Aug. 7. (AFP)

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