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Sharp Fall in Eurozone Inflation Heaps Pressure on ECB

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Eurozone heading for damaging inflation cycle

BRUSSELS, April 1, 2014 (AFP) – Eurozone inflation fell to 0.5 percent in March, official data showed on Monday, the lowest rate since the financial crisis, stoking fears the bloc could be heading for a damaging cycle of deflation.
Inflation in the currency bloc has trended steadily lower in recent months, coming in well below the European Central Bank target rate of just under 2.0 percent.
The latest figure, the lowest since late 2009, comes just ahead of an ECB policy meeting on Thursday and heaps pressure on the central bank to do something to reverse the trend.
By component, food, alcohol and tobacco prices rose 1.1 percent in March, after rising 1.5 percent in February, but energy costs were down 2.1 percent, after a fall of 2.3 percent in February, the Eurostat statistics agency said.
Ben May, economist at Capital Economics, said the latest fall was partly due to temporary factors, including last year’s early Easter, which was affecting the year-to-year rate.
“Nonetheless, the weakness of inflation suggests that the ECB may have little option but to take further policy action,” he said.
The danger is that a broad, sustained decline in prices can lead people to postpone purchases in the hope that prices will tumble even further, resulting in a vicious circle from which escape is difficult.
Inflation is even falling in Germany, the bloc’s biggest economy, where at one percent, the rate was at its lowest level in more than three years in March.
And in crisis-hit Spain, consumer prices actually fell 0.2 percent in March after only crawling 0.1-percent higher the previous month.
Italy’s annual inflation rate also slowed to its slowest pace since October 2009 at 0.4 percent.
Until this latest data, the ECB was not expected to announce any new measures on Thursday, given recent data suggesting the bloc’s economy is in a tentative recovery.
But for Christian Schulz, head economist at Berenberg Bank, “the after-effects of the euro crisis continue to drive down eurozone inflation and maintain the pressure on the ECB to stimulate the economy.”
ECB officials have repeatedly said they see no threat of deflation, even though president Mario Draghi reiterated last week that the central bank stood ready to act if necessary.
“If any downside risks to (our inflation) scenario appear, we stand ready to take additional monetary policy measures that ensure our mandate is fulfilled,” Draghi told a conference in Paris.
“In other words, we will do what is needed to maintain price stability,” Draghi insisted.
The ECB has held its key “refi” refinancing rate at an all-time low of 0.25 percent since November.

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