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EcoTV: The expertise of the economic research department of BNP Paribas. Inflation is said to get soon into negative territory, is this a risk? Philippe dArvisenet: Note that inflation getting in negative territory just tells us that the purchasing power of income is to increase because things are cheaper and that is mainly driven by the fact that one year ago oil prices were on the upside. With time, these effects disappear and inflation drops. The issue is somewhere else. We are in a global recession, which is the worst and the longest since the second World War and that creates a big gap in resource utilization and pushes prices down progressively, so the risk is that prices excluding oil, would come in negative territory in one year from now. And there is deflation, because if you see that prices are going down, if you believe that it is to continue, you wait before you buy anything. Thus, there is no demand, so prices go down further and you are in a deflationary spiral. Sibylle Dehesdin: so what can the economic policy do about it? Philippe dArvisenet: Well, obviously monetary policy has to cut rates, but that is already done. In many countries it is close to zero and monetary policy is in a trap because when interest rates are at zero, and inflation is going down in negative territory real rates increase, the burden of debt increases and you are in the vicious circle. So you have to imagine something else. Something else is fiscal policy, implement most governments spending, tax cuts, whatever and basically if you re-think about monetary policy you have to implement a quantitative easing, in two or three steps. One is committed to keep rates low for a long time, the Fed has already done that. Second, if necessary, for the central bank to buy long-term government securities in order to keep long term rates low and to inject money. So this money is used the economic agents to take more risks and buy other securities and shares and that would push prices up a little bit. Sibylle Dehesdin: so in a more distant future, there is an inflationary risk? Philippe dArvisenet: Well when you see the size of the Fes balance sheet that was below 1 trillion last September and which is heading to more than 2 trillion now and which will probably reach 4 to 5 trillion in a few quarters from now, obviously you have a risk because it creates a lot of money and the risk of inflation in when there is too much money for too few goods. So in time they have to imagine a sort of exit strategy if you will, in order to withdraw this liquidity otherwise you would have obviously an inflation risk and then the bond market could suffer a lot. Sibylle Dehesdin: Thank you Philippe And your editorials are on line each week on the economic department website. http://economic-research.bnpparibas.com