Eurozone inflation stays weak at 0.5% in June

GMT 17:10 2014 Monday ,30 June

Arab Today, arab today Eurozone inflation stays weak at 0.5% in June

European Central Bank
Brussels - AFP

Eurozone inflation is still stuck at the lowest levels since the financial crisis, new data showed on Monday, highlighting the threat of deflation but analysts say the ECB is unlikely to ease policy further this week. 
Deflation is such a threat that the European Central Bank has moved into negative interest rates to get cash flowing, and authorities are closely watching inflation rates in the hope that it will edge up towards the bank's target.
But the European Union's statistics office Eurostat said in a first estimate that inflation across the 18-nation eurozone was 0.5 percent in June -- the same level as in May.
This means that inflation is at the lowest level since the financial crisis of 2008-2009 nearly froze the market on which banks lend to each other and caused recession in several advanced economies.
ECB data released on Monday also showed that loans to the private sector in the eurozone fell by 2.0 percent in May, even faster than the 1.8-percent drop the previous month. 
"June's weak eurozone inflation figure will add to pressure on the ECB to provide more policy support, particularly given recent signs that the recovery may already be slowing," said Capital Economics senior economist Jennifer McKeown.
"While the bank is unlikely to act again at its meeting this week, we think that it will ultimately implement a large scale quantitive easing (bond-buying) programme to tackle the risk of deflation."
Inflation has been far below the ECB's target of just under 2.0 percent, threatening its main statutory obligation to ensure price stability.
Slow growth can be both a cause and consequences of unduly low inflation.
That is why the ECB has lowered its benchmark refinancing rate to 0.15 percent, and moved the deposit rate at which it pays banks for depositing money with it at minus 0.10 percent, meaning the banks are charged if they park money instead of using it.
When inflation rises above 2.0 percent in advanced economies, business and households begin to anticipate further rises, stoking so-called second-round inflation.
But when inflation is much below 1.0 percent for a long time, people delay purchases and investment in the belief that prices will fall further. That cuts demand, can cause recession, reduces demand and growth and increases unemployment in a vicious spiral which is difficult for central banks to reverse.
- Weak outlook -
At the beginning of June, the ECB lowered its forecasts for inflation in the eurozone up to 2016, saying it would be 0.7 percent this year, 1.1 percent next year and 1.4 percent in 2016.
In March, it was forecasting 1.0 percent this year then 1.3 percent and 1.5 percent.
The president of the ECB Mario Draghi said at a press conference after the last meeting of the bank on June 5 that inflation would remain weak in coming months.
The latest data showed that in June, the prices for services in the eurozone rose by 1.3 percent after 1.1 percent in May.
Prices for energy rose by 0.1 percent from zero increase in May. prices for food, alcoholic drinks and tobacco fell by 0.2 percent after an increase of 0.1 percent.
Analysts are divided over the dangers of inflation, with some saying that the eurozone is not seriously at risk, while others warn that with inflation running so low, shocks to economies or in the international economic climate could dent confidence enough to tip the single currency area into deflation.
Some analysts argue the ECB may have to begin a programme of quantitive easing, meaning the purchasing of government debt already issued and traded on the market, as a means of injecting extra cash into the financial system to push up prices.
That would also tend to weaken the euro, which would push up the prices of imported goods such as oil.
"The ECB has just announced new measures to signal its readiness to bring inflation back to target and boost lending, but it will surely keep the door wide open to more measures at this week's meeting," said Christian Schulz, a senior economist at Berenberg.

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