The time has come when the European Central Bank must act with ‘unconventional’ tools to achieve its target of an inflation rate ‘below but close to 2 per cent’, for two simple reasons. The first is that the annual rate of (consumer price) inflation became negative in December 2014, has been below 1% since October 2013, and is not certain to recover soon on its own. The second reason is that all other tools available to the ECB have been tried, including the new facility of ultra-cheap refinancing of banks launched last September, but have not worked, owing to the fact that the demand for loans by the private sector remains fat or is shrinking in many eurozone member states. Inflation expectations in the two-to-fve-year horizon are falling towards zero in all the main financial markets in the eurozone, indicating that financial markets are losing faith in the ability of the ECB to achieve its inflation target.

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