Saturday 10 December 2016

Eurozone inflation stalls despite ECB measures

Published 06/01/2016 | 02:30

European Central Bank (ECB) President Mario Draghi
European Central Bank (ECB) President Mario Draghi

Core inflation in the Eurozone weakened for the second month running, signalling efforts by the European Central Bank (ECB) to boost inflation in the single currency area isn't having the desired effect

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Core inflation, which excludes volatile energy and food prices, eased to 0.8pc from 0.9pc in November and 1pc in October.

Headline inflation, targeted by the European Central Bank, held steady at 0.2pc, missing expectations for a rise to 0.3pc and still far short of the bank's target, Europe's statistical agency Eurostat said.

The data pushed the value of the euro lower against the dollar, to $1.07 by mid-afternoon.

The ECB cut its deposit rate deeper into negative territory in December and extended its quantitative easing programme by six months, hoping to boost price growth and bolster long-term inflation expectations.

ECB President Mario Draghi has warned tthat low core inflation is a worry because it is a good predictor of where inflation is likely to stabilise in the medium-term.

The data comes as analysts at Bank of America forecast that the euro would be worth less than the dollar by the end of the year.

It forecast that the euro will fall to $0.95 by the end of the year, making it much more expensive for Irish holidaymakers to visit the US.

But it's likely to boost Ireland's offering as a tourist destination for American visitors and help our crucial export sector.

Bank of America said the ECB gained some credibility in early 2015, then lost some by the end of the year.

"We see two potential long-term challenges for the ECB," the lender said.

"First, markets could test the ECB's commitment to QE if we see inflation divergence between Germany and the rest of the Eurozone, squeezing the euro higher.

"Second, we believe a periphery sell-off as the ECB approaches its inflation target and the market starts pricing the end of QE could bring crisis risks back and keep the Euro weak even post-QE.

"We argue that these are challenges that the ECB may have to address towards the end of 2016/early 2017 and that they could trigger more volatility."

European stocks began the day in fragile form, but resumed their advance as commodity producers rebounded.

(Additional reporting Reuters)

Irish Independent

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