Friday 13 December 2019

Eurozone inflation drops to lowest level in over four years

Mario Draghi, President of the European Central Bank
Mario Draghi, President of the European Central Bank
Mario Draghi, ECB president

Robin Emmott and Philip Blenkinsop

Eurozone inflation hit its lowest level since November 2009 in March, a shock drop that raises expectations the European Central Bank will take radical action to stop the threat of deflation in the currency bloc.

Annual consumer inflation in the 18 countries sharing the euro was 0.5pc in March, with the pace of price rises cooling from February's 0.7pc reading, the EU's statistics office Eurostat said yesterday.

Economists polled by Reuters had predicted a 0.6pc reading – itself worrying for an economy that is barely pulling out of a record-long recession.

Inflation has now been in the ECB's "danger zone" of below 1pc for six consecutive months, and the flash reading increases the chances the ECB will cut interest rates when its Governing Council meets on Thursday. Speculation has also grown that it may employ other easing measures, such as a negative deposit rate or even US-style bond-buying.

Inflation in Ireland, when measured using Eurostat methods, rose 0.7pc in February. There are no Irish figures for March yet.

But this year's late Easter, which has delayed the impact of rising travel and hotel prices at a time when many people go away in Europe, could encourage the eurozone's central bank to wait until its June meeting to act.

"This will keep the possibility of further monetary policy easing very much alive," said Nick Kounis, head of economic research at ABN AMRO in Amsterdam.

"Nevertheless, the central bank has shown quite some tolerance for low inflation recently."

The ECB, which targets inflation of just below 2pc, left borrowing costs unchanged at 0.25pc in March and has argued that deflation risks in the bloc are limited.

Yesterday, the International Monetary Fund's top European official said the ECB had more room to cut interest rates to counter risks from low inflation, although he said the fund did not see deflation setting in.

"We are not so much worried about deflation by itself, but we are very worried about what we call 'low-flation'," said Reza Moghadam, director of the IMF's European department.

EASING

"There is more room for further (ECB) easing, not least because inflation is under control."

ECB President Mario Draghi, pictured, suggested after the ECB's March meeting that the bank would either do nothing or take bold action should the outlook deteriorate. He has also said the bank has been preparing additional policy steps to guard against possible deflation, and that the longer inflation remained low, the higher was the probability of deflationary risks emerging.

"There's still a case for easing, but we don't think there's going to be enough agreement within the Governing Council members to ease on Thursday," said Guillaume Menuet, an economist at Citigroup in London. (Reuters)

Irish Independent

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