Eurozone returns to deflation, prompting more stimulus talk

Most of the price fall was accounted for by an 8 per cent year-on-year collapse in the price of energy

The eurozone unexpectedly slipped back into deflation in February, increasing the likelihood of more stimulus from the European Central Bank at its meeting on 10 March.

Consumer prices in the bloc fell by 0.2 per cent year on year, according to Eurostat. This was down on inflation of 0.3 per cent in January and weaker than economists’ expectations of a zero reading for the month. It was the first negative figure for inflation in the 19 member currency zone since last September.

Most of the price fall was accounted for by an 8 per cent year-on-year collapse in the price of energy, reflecting the ongoing weakness of the global oil price. But core inflation – excluding volatile items such as energy and alcohol– also slipped back to 0.8 per cent, down from 1 per cent in January.

After the ECB’s January meeting, the central bank’s president Mario Draghi said he would be looking out for “second-round effects” of low oil prices, potentially creating deflationary dynamics in the eurozone. The dip in core inflation will further strengthen the hand of those on the ECB governing council who want to do more.

Jennifer McKeown, at Capital Economics, said the data gave the doves on the ECB’s Governing Council “plenty of ammunition” and predicted that the central bank, led by Mario Draghi, would cut its main deposit rate by 20 basis points and step up the pace of asset purchases from to $80bn a month.

Nick Kounis of ABN Amro said the ECB might act “more aggressively” than the markets currently expect, adding that the central bank would have an eye on the external value of the currency. 

“Getting the euro back down is the only way to get core inflation up significantly over the coming months, but that is not going to be easy given the Fed is likely to be on hold and some ECB easing is already priced in,” he said. The euro fell two thirds of a cent against the dollar yesterday.

Minutes from the ECB’s last meeting in January reported the governing council was already shifting towards more action.

But the most influential hawk on the ECB council, Bundesbank president Jens Weidmann, said last week that he was not particularly worried about second-round effects, and warned about the adverse effects of more stimulus, such as on the stability of commercial banks, saying it “would be dangerous to simply  ignore” them.

Some other economists are also sceptical over how much good more stimulus would do. “Further monetary stimulus may not boost growth because banks may opt to park their money at the ECB,”  said Tomas Holinka of  Moody’s Analytics.

G20 finance ministers and central bankers agreed at the weekend to use “all policy tools, monetary, fiscal and structural – individually and collectively” to renew  global growth.

In order to return inflation to the official target of just below 2 per cent, the ECB in January 2015 launched a $60bn-a-month asset purchase programme, which is scheduled to last until at least September 2016. The central bank has also cut its deposit rate to -0.3 per cent to discourage banks from parking money with it and to lend the funds out instead.

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