Thursday 23 October 2014

Low inflation piles pressure on ECB

Published 01/02/2014 | 02:30

European Central Bank (ECB) President Mario Draghi attends a session at the annual meeting of the World Economic Forum (WEF) in Davos January 24, 2014.
European Central Bank (ECB) President Mario Draghi

Eurozone inflation unexpectedly slowed in January, heaping pressure on the European Central Bank (ECB) to step in amid fears of deflation.

Inflation fell fractionally to 0.7pc from 0.8pc, but the move may push the Frankfurt-based bank to take action to reverse the downward push on prices.

It was at this level that the ECB announced a surprise rate cut to a record low of 0.25pc in November, but hasn't taken action since.

It comes just days after European Commission Vice President Olli Rehn said he was "genuinely concerned" about a period of low inflation in Europe.

Separate data also released by Eurostat shows that the unemployment figure in the 18-member bloc remained stable but stubbornly high, at 12pc for the third month running.

The euro fell to a two-month low after the inflation data, but government bonds rallied as investors believed the ECB was close to stepping in.

Although ECB President Mario Draghi, pictured, said in January deflation was not a threat, a number of countries are already suffering deflation and the International Monetary Fund warned deflation was a potential risk.

Following a meeting of eurozone finance ministers on Monday, Mr Rehn said that the fear of deflation – a period of falling prices – was remote, and he pointed to the ECB's pledge to do all it can if the situation worsens.

"I am genuinely concerned as to the possibility of us having a lengthy period of low inflation in Europe," he said.

"Why so? Because that would have a negative impact on the necessary rebalancing process of the eurozone."

He said a low period of inflation would "harm and hamper the necessary adjustment, especially in southern Europe''.

Falling energy prices were the main reason for the slip in January, which fell 1.2pc from a month earlier. The ECB has set an inflation target of 2pc but its own forecast is for inflation of just 1.3pc this year, well below that target.

Mr Draghi has said the Central Bank will act to ease monetary policy further if that outlook deteriorates.

"The ECB's sensitivity to inflation data was already high and even a small surprise like this one today might tip the balance towards more easing," said Frederik Ducrozet of Credit Agricole.

"I would not expect action next week, rather a stronger wording for a possible cut later, possibly in March," he added.

In Germany, consumer prices fell by 0.7pc on the month, keeping the annual inflation rate steady at 1.2pc, with both figures coming below expectations.

Irish Independent

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