If European Central Bank policy makers were considering sitting on their hands again at their monthly meeting on Thursday, the latest non-inflation data ought to be enough to change their minds.
News that the euro zone's annual inflation rate fell to a mere 0.5 per cent in May sent tremors through global markets – and with good reason.
Most economy watchers were stunned by the decline, which matched a nearly five-year low in March and signalled that the 18-country union is in danger of veering off the obstacle-strewn road to recovery. Their oft-repeated prescription remains the same: some combination of hefty asset purchases, a fresh injection of liquidity into the financial system, and rate cuts designed to take the steam out of an overvalued euro and discourage commercial banks from parking excessive amounts of capital in the ECB vaults.
Yet as the bleak spectre of deflation looms, it's not a safe bet that the ECB will opt for such dramatic intervention.
Indeed, Ewald Nowotny, an influential member of the ECB's governing council, pointedly warned that central banks have little in their arsenal to combat what is occurring in Europe. He didn't dismiss the deflation risk, but observed that it stems from both weak demand and such supply-side factors as declining energy and food prices, which are largely immune to central bank influence.
"One shouldn't overestimate the possibilities of monetary policy," Mr. Nowotny told a panel discussion on the subject in Vienna.
Mr. Nowotny, who is also chief of the central bank in Austria, where fears of high inflation are as deeply embedded as they are in Germany, mused earlier this year that the problem of extremely low inflation might be resolved without any nudge from the ECB.
The keys to such a felicitous outcome would be higher wage settlements in the relatively healthy German economy, a further strengthening of the wider regional economy and a natural slippage in the value of the euro. That would boost the cost of imports and make the battered peripheral economies of southern Europe more competitive.
There is no indication that ECB president Mario Draghi, who has acknowledged the threat posed by a downward price spiral, shares such a benign view.
And the ECB chief could draw support this time from the inflation hawks at the Bundesbank after a surprisingly steep drop in German inflation to 0.6 per cent year-over-year from 1.1 per cent in April. That was well below analysts' consensus estimate of 1 per cent. And even though it was likely only a temporary blip, it definitely gives Mr. Draghi and other dovish ECB board members more ammunition for their interventionist case.
Mr. Draghi has been dropping hints for weeks that a rate cut is coming. But no one believes reducing the key refinancing rate by 0.10 or 0.15 percentage points from its current level of just 0.25 per cent will have any more than a symbolic impact.
Policy makers have also been weighing a bolder move to take the ECB's deposit rate for commercial banks into negative territory for the first time. Forcing commercial banks to pay for stashing their money ought to be an inducement to put it to better use.
But it won't necessarily spark a wave of lending in a weak economy. When the Swiss and Danish central banks turned to negative interest rates, banks simply hiked their own loan rates to cover their increased costs.