With euro zone inflation disappearing, ECB poised to act

Tue Jun 3, 2014 7:32am EDT
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By Martin Santa

BRUSSELS (Reuters) - Euro zone inflation fell unexpectedly in May, all-but sealing the case for the European Central Bank to act this week with a batch of measures to stimulate the economy and keep it from the clutches of deflation. Annual consumer inflation in the 18 countries sharing the euro fell to 0.5 percent in May from 0.7 percent in April, the EU's statistics office Eurostat said on Tuesday. Economists polled by Reuters had expected inflation to remain steady.

ECB policymakers have flagged a policy move for their meeting on Thursday and the bank's president, Mario Draghi, said last week the ECB was equipped to get inflation back to its target - just below 2 percent.

The weak May inflation reading - back at levels last seen in March, which was the lowest level since November 2009 - bolsters the case for action and will undermine any resistance hawkish members of the Governing Council might put up. "The ECB hardly needs any more reason to deliver a major package of stimulative measures at its June policy meeting on Thursday to counter the risk of prolonged very low inflation turning into deflation," said Howard Archer, chief European economist at consultancy IHS Global Insight.

Sources told Reuters last month that the ECB was preparing a package of policy options for its Thursday's meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms (SMEs).

The weak May price rises cemented expectations that the ECB will now deliver a package of measures to stimulate the economy, though U.S.-style quantitative easing (QE) - or money printing to buy assets - remains some way off. "The numbers only add pressure on the ECB to spice up its easing package further this Thursday," said Jan von Gerich, strategist at Nordea.

Tuesday's reading came after a low number from Germany.   

Inflation in the 9.5 trillion euro economy is stuck in the ECB's 'danger zone' of below 1 percent, a sign of the fragile recovery. The ECB says it stands ready to use all tools available to fend off deflation risks and aid the economy.

"The ECB has consistently underestimated the deflationary forces threatening Europe and now is the time for unconventional monetary policy," said Dominic Rossi, global chief investment officer at Fidelity Worldwide Investment.   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