Vanishing euro zone inflation seen intensifying ECB policy headache

Thu Aug 28, 2014 7:07pm EDT
 
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By Martin Santa and Eva Taylor

BRUSSELS/FRANKFURT (Reuters) - If euro zone inflation falls deeper into the 'danger zone' as expected on Friday, it will at the very least complicate the European Central Bank's plans to wait and see whether its recent policy move to ignite the euro zone economy will work.

Inflation in the 18 countries using the euro is seen dropping to 0.3 percent in August, following a surprise dip to 0.4 percent in July, according to a Reuters poll of analysts. The data is due at 5 a.m. ET on Friday.

Together with updated projections from ECB staff, the data is likely to lead to a lively discussion at the ECB's Sept. 4 policy meeting about whether to accelerate existing policy measures because of the danger of deflation.

New action is unlikely though not impossible, according to ECB sources, who told Reuters the ECB is unlikely to act at next week's meeting unless the inflation figures show the euro zone sinking significantly toward deflation.

Inflation in the bloc's largest economy Germany on Thursday suggested the overall headline for the euro zone may not deliver a bigger than expected drop.

It was steady at 0.8 percent growth. Spain, the fourth largest economy, reported consumer prices fell 0.5 percent, lower than in July.

The ECB targets an inflation rate at below-but-close to 2 percent, a level not seen since the first quarter of 2013. It has been in what ECB President Mario Draghi has called "the danger zone" of below 1 percent since October last year.

Speaking in Jackson Hole last week, Draghi conceded that financial markets indicated "significant declines at all horizons" in inflation expectations, pledging to use "all the available instruments needed" to ensure price stability.   Continued...

 
General view of the headquarters of the European Central Bank (ECB) before the bank's monthly news conference in Frankfurt August 7, 2014.  REUTERS/Ralph Orlowski