Low inflation to spark policy debate, but ECB seen holding steady

Tue Apr 1, 2014 4:37am EDT
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By Eva Taylor

FRANKFURT (Reuters) - The European Central Bank is not expected to announce any new measures on Thursday to boost the euro zone economy, although inflation dropping to close to zero could well prompt active discussion about stimulus.

Negative deposit rates - charging banks to deposit at the ECB - and some form of asset-buying program may lie further out.

Euro zone annual inflation ticked down to 0.5 percent in March, its lowest since the economy was deep in recession in 2009, and its sixth month in what ECB President Mario Draghi has called "the danger zone" below 1 percent.

The fall in inflation was slightly sharper than expected, and gave ammunition to those on the ECB'S Governing Council who want do more to stem the threat of deflation.

However March's inflation reading is not seen prompting policy action right away, as it is not much weaker than the ECB's forecast last month and was driven by the kind of softer food and energy prices the bank usually judges as temporary.

"Did the inflation outlook deteriorate compared to last month? I don't think so," said Anders Svendsen, chief analyst at Nordea. "It would be odd to do something now that they could have done last month and chose not to."

The ECB refrained from taking further action in March despite forecasting inflation would undershoot its target of below but close to 2 percent well into 2016, which disappointed the market and pushed up the euro exchange rate close to $1.40, its strongest level since October 2011.

Since then, several policymakers have talked about what the ECB could do should the exchange rate weigh more on inflation and if the risk of deflation became more serious. <ECB/QUOTES>   Continued...

An illuminated euro sign is seen in front of the headquarters of the European Central Bank (ECB) in the late evening in Frankfurt January 8, 2013. REUTERS/Kai Pfaffenbach