Return to deflation puts pressure on European Central Bank

Belinda Weber
17:12, Mar 1, 2016
Copyright 2015 All rights reserved. This material can't be published, transferred, copied or redistributed.
Copyright 2015 All rights reserved. This material can't be published, transferred, copied or redistributed.

Euro area annual inflation is expected to be -0.2 per cent in February, down from 0.3 per cent in January, Eurostat estimates.

"The fall is largely due to continued downward pressure in fuel prices, which fell by 5.6 per cent [in February], following a 4.8 per cent fall last month", said Melbourne Institute's senior research fellow Dr Sam Tsiaplias.

The dollar was buying 112.75 yen, edging up about 0.1 per cent, while the Australian dollar added 0.2 per cent against its US counterpart to $0.7155 after the Reserve Bank of Australia left its rates at a record low 2.0 per cent. "But no matter what the European Central Bank decides to do on 10 March, inflation is likely to hover around zero during the next few months before it picks up - if oil prices behave well", Sandte added.

European Central Bank President Mario Draghi recently indicated that news easing measures could be implemented as early as the European Central Bank's next meeting on the 10th March.

Although intuitively lower prices appear as a positive thing from households' point of view, according to economists, falling prices are in fact worse than rising prices as consumers demonstrate weaker demand in the long run, thus discouraging investment.

"With inflation expectations low and falling, the threat of a more persistent bout of deflation remains very real", Jessica Hinds, an economist at Capital Economics in London wrote in a client note before the data. Core inflation, which strips out volatile elements such as food and energy, was at 0.7 per cent, down from one per cent in the prior month.

It has already announced a cut to its bank deposit rate, which remains in negative territory.

In France they were down 0.1 percent and Italy reported flat month-on-month wage inflation.

The dollar was up 0.5 percent against the yen at 113.14 JPY= and the euro was 0.4 percent higher at 123 yen EURJPY=, recovering from a low of 122.085 struck earlier in the Asian session, its lowest level since April 2013.

All consumer prices in the eurozone fell 0.2% on an annual basis. "If the low energy prices have sustainable long-term effects, we have to act". "(This) ramps up pressure for major March stimulus", he said.

In Asia overnight, MSCI's broadest index of Asia-Pacific shares outside Japan ended up 1.3 per cent, as Chinese stocks climbed 1.8 per cent after Monday's easing move from the PBOC as it cut banks' reserve requirements.

It had fallen on Monday after a report showed euro zone inflation was weaker than expected in February.

However, Mr. Weidmann also objected to the launch of the bond-purchase program and its subsequent expansion past year, and was overruled on both occasions.

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Copyright 2015 All rights reserved. This material can't be published, transferred, copied or redistributed.


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