Euro zone inflation drops to lowest since 2009
By Robin Emmott and Philip Blenkinsop
BRUSSELS (Reuters) - Euro zone inflation hit its lowest level since November 2009 in March, a shock drop that raises expectations the European Central Bank will take radical action to stop the threat of deflation in the currency bloc.
Annual consumer inflation in the 18 countries sharing the euro was 0.5 percent in March, with the pace of price rises cooling from February's 0.7 percent reading, the EU's statistics office Eurostat said on Monday.
Economists polled by Reuters had predicted a 0.6 percent reading - itself worrying for an economy that is barely pulling out of a record-long recession after a crisis that nearly broke up the currency area.
The euro zone is far from the deflation that Japan suffered from the early 1990s, when falling prices weakened demand, leading to wage cuts and even lower prices, but the bloc's low inflation rate is a clear sign of economic fragility.
Inflation has now been in the ECB's "danger zone" of below 1 percent for six consecutive months, and the flash reading increases the chances the ECB will cut interest rates when its Governing Council meets on Thursday. Speculation has also grown that it may employ other easing measures such as a negative deposit rate or even U.S.-style bond-buying.
But this year's late Easter, which has delayed the impact of rising travel and hotel prices at a time when many people go away in Europe, could encourage the euro zone's central bank to wait until its June meeting to act.
"This will keep the possibility of further monetary policy easing very much alive," said Nick Kounis, head of economic research at ABN AMRO in Amsterdam. "Nevertheless, the central bank has shown quite some tolerance for low inflation recently."
The ECB, which targets inflation of just below 2 percent, left borrowing costs unchanged at 0.25 percent in March and has argued that deflation risks in the bloc are limited. Continued...