Experience shows that deflation induced by economic slack can lead to extended periods of poor economic performance; indeed, even a significant perceived risk of deflation may lead firms to be more cautious about investment and hiring.
However, local factors played a key role as Standard & Poor’s, while affirming the country’s credit rating, had revised the outlook on the rating to negative, a move that was not generally expected by the market. In addition, the changes in the Ministry of Finance shortly after the ratings action, drew an adverse reaction from the markets and contributed to further significant depreciation.