Euro zone inflation stabilizes in 'danger zone'

Fri Feb 28, 2014 11:06am EST
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By Jan Strupczewski

BRUSSELS (Reuters) - Euro zone inflation stabilized in the European Central Bank's "danger zone" in February but did not fall as expected, making it less likely the ECB will loosen monetary policy further at its monthly meeting next week.

European Union statistics office Eurostat estimated on Friday that consumer prices in the 18 countries sharing the euro rose an annual 0.8 percent this month. That was the same rate as in January and December, after readings of 0.9 percent in November and 0.7 percent in October.

Economists polled by Reuters had forecast inflation would slow to 0.7 percent. Fears the bloc may be at risk of deflation as it struggles to recover from its debt crisis have raised expectations the ECB will use interest rates or other policy tools to give the economy further support.

"The higher than expected inflation numbers reduce the chances of an ECB rate cut at next week's meeting, and we maintain the view that ... the central bank will keep rates on hold," said Nick Kounis, head of macro research at ABN AMRO.

ECB President Mario Draghi has warned of the risk of inflation getting stuck in a danger zone below 1 percent, but said again on Thursday that there was clearly no deflation.

"While the ECB does not see deflation as a serious threat in the euro zone, it is worried about inflation staying below 1 percent for a prolonged period, thereby destabilizing inflation expectations," IHS Global Insight economist Howard Archer said.

"Consequently, it still looks touch-and-go whether the ECB will take any further stimulative action at its March 6 policy meeting. Much will likely depend on whether the ECB staff's new forecasts show euro zone consumer price inflation still below 2.0 percent in 2016."

The February inflation rate was stable because lower energy costs were offset by more expensive industrial goods and services, the Eurostat data showed.   Continued...

The euro sign landmark is seen at the headquarters (R) of the European Central Bank (ECB) in Frankfurt September 2, 2013. REUTERS/Kai Pfaffenbach