European Union : Inflation below zero

 

 

As Mario Draghi prepares to ramp up debt purchases starting Friday in his biggest assault against euro-area deflation risks, he’s about to get another sense of the magnitude of the challenge. Consumer prices in the currency zone probably fell for a second month in March and the unemployment rate remained in double digits in February. 

Policy makers led by the European Central Bank president are expanding monthly asset buying to 80 billion euros ($89 billion) from 60 billion euros and introducing new measures to lift inflation that hasn’t touched their near-2 percent goal since 2013. While the economy is growing, it’s not gaining momentum, and a slow decline in unemployment has failed to spur enough demand to counter falling oil costs and ignite price gains.

“The data will confirm that the ECB was right to act, and also may even need to do more in the future,” said Nick Kounis, an economist at ABN Amro Bank NV in Amsterdam. 

Draghi said this month that negative inflation rates may be “unavoidable” in the coming months and it’s “crucial to avoid second-round effects.” That concern prompted the ECB Governing Council to cut its deposit rate on March 10 and add a new series of long-term loans to banks, which will begin in June. The expansion of quantitative easing will start April 1.

“The window of action was now, we had a weak start to the year, and we’re seeing that feeding through to the numbers,” said Anatoli Annenkov, senior economist at Societe Generale in London. He doesn’t expect any additional major ECB action this year, as policy makers wait to see how their new actions feed through to the economy.

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Data on Tuesday showed M3 money-supply growth held steady at 5 percent and euro-area bank lending to non-financial companies accelerated, rising 0.9 percent in the 12 months through February compared with 0.6 percent in the period to January. Draghi said earlier this month that loan growth is “still too low” and the ECB’s new program aims to provide funding certainty to banks to help boost credit to companies.

“The key to the ECB for getting inflation back on target is that we do need to see growth really pick up, and the recovery to take it to the next level,” said James Nixon, an economist at Oxford Economics in London. “It’s really the corporate sector that’s just sitting around with its hands in its pockets.”

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J.Mason♦

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