Eurozone inflation fall heightens pressure on ECB

GMT 12:53 2016 Monday ,29 February

Arab Today, arab today Eurozone inflation fall heightens pressure on ECB

Eurozone inflation in February fell sharply to negative 0.2%, figures show
Brussels - AFP

Eurozone inflation in February plunged sharply back into negative territory, data showed on Monday, in the clearest sign yet that several rounds of stimulus measures by the European Central Bank are not working.

The ECB is under huge pressure to revive prices and the economy in the single currency zone, with many of the 19 national governments that use the euro still not delivering a convincing recovery three years after the eurozone debt crisis.

The steep drop to negative 0.2 percent came in well below analysts' forecast of zero percent inflation, which is already much lower than the ECB's official two-percent target.

This was a big fall from a revised rise of 0.3 percent inflation just a month before.

The sharp nosedive puts the eurozone into negative territory for the first time since September and dashes hopes that unprecedented efforts to boost prices by the ECB were slowly having an effect in Europe.
"February's drop... back into negative territory intensifies the pressure on the ECB to announce a decisive increase in its policy support after it meets next week," said Jennifer McKeown, European economist at Capital Economics.

- 'Focus minds' -

The eurozone has been drifting in and out of deflation since December 2014, unable to shake fears that Europe has entered a long-term period of falling prices and low growth that has plagued Japan for nearly two decades.

While cheaper prices may at first seem a good thing to households, in the long term they demonstrate weaker demand and a lack of confidence by consumers causing more deflation, lower wages and even recession.

Falling oil prices and slowing economic growth in China and other emerging economies are weighing on the headline rate of inflation in the 19-country area that uses the European single currency.
Eurostat said energy prices in February fell by 8.0 percent, after a far slower decline of 5.4 percent a month before.

"Today’s deflation surprise will focus minds again on the negatives of low inflation," said Teunis Brosens, an analyst at ING Bank in the Netherlands.

Low inflation "is especially bad for debt-laden households, businesses and governments in southern Europe, which will have little scope to inflate away" their debt burden, he said.

- 'Seals the deal' -

The ECB holds its monthly policy meeting on March 10, and the return of deflation will increase speculation that bank chief Mario Draghi will announce a further effort to reverse the fall in prices.

"The ECB will be most worried as eurozone core inflation narrows to 0.7 percent in February from 1.0 percent in January," said IHS Economist Howard Archer, referring to the closely watched inflation measure that strips out energy and other volatile prices.

"(This) ramps up pressure for major March stimulus," he said.

The ECB has already rolled out a range of different policy measures to help get the eurozone economy back on its feet, most recently a controversial programme of bond purchases known as quantitative easing or QE.

Draghi insisted earlier this month the policies were working and that the ECB "will not hesitate to act" if more effort is needed.

"Today’s weak core inflation... pretty much seals the deal on additional monetary easing," said ING's Brosens.


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