Euro bills.

The Eurozone’s Minsky Conundrum

Stubbornly low inflation has the European Central Bank worried. But its response – buying even more bonds and lowering its benchmark interest rate even further into negative territory – could backfire, exacerbating existing imbalances and generating serious financial instability.

BRUSSELS – Stubbornly low inflation has the European Central Bank worried. But its response – essentially just more quantitative easing – could backfire, exacerbating imbalances and generating serious financial instability.

As it stands, the headline consumer price index in the eurozone hovers around zero, and even core inflation remains below 1% – too far for comfort from the ECB’s target of around 2%. While a new round of weakness in global commodity prices earlier this year contributed to these figures, it does not explain the weakness in longer-term inflation expectations, which have improved little since March, when the ECB started its massive €60 billion ($66.3 billion) per month bond-buying program.

But instead of rethinking its strategy, the ECB is considering doubling down: buying even more bonds and lowering its benchmark interest rate even further into negative territory. This would be a serious mistake.

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