Eurozone inflation stays low as ECB prepares for stimulus
IT IS EXPECTED IT WILL BE COSTLY FOR COMMERCIAL BANKS TO PARK CASH AT CENTRAL BANK
As if the European Central Bank needed any more incentive to inject another dose of stimulus into the 19-country Eurozone economy, official figures yesterday showed inflation in the region remains worryingly low.
The annual rate of price increase across the Eurozone was stuck at 0.1 per cent in November, the European Union’s statistics agency said. That was below market expectations for an uptick to 0.2 per cent and way short of the ECB’s target of just below 2 per cent.
As a result of weak inflation and growth, the central bank is expected to announce another stimulus for the Eurozone at the conclusion of its policy meeting today despite some reservations within the ECB’s governing council.
Most economists expect the ECB to make it more expensive for commercial banks to park their cash at the central bank — cutting the so-called deposit rate further into negative territory — and to extend and swell its current €1.1 trillion (Dh4.3 trillion, $1.2 trillion) government bond-buying programme.
Jonathan Loynes, chief European economist at Capital Economics, said the inflation numbers have given the “green light” to the ECB to announce “muchneeded extra stimulus” today.
Nervous
“The ECB is likely to remain nervous that a further period of low inflation will lead to a bigger drop in inflation expectations and take action tomorrow accordingly,” said Loynes. He expects the ECB to increase its monthly pace of asset purchases from €60 billion to 80 billion and cut its deposit rate by a further 0.20 percentage point to minus 0.4 per cent. The aim of both measures would be to stoke inflation by giving a boost to economic activity in the region through a combination of low interest rates and more bank lending.
Policymakers at the ECB will be particularly concerned by the fact that the core inflation rate, which strips out volatile items such as energy, food, alcohol and tobacco, fell to 0.9 per cent from 1.1 per cent. The consensus in the markets was the rate to remain unchanged.
The low core rate is likely to fuel concerns that low inflation is becoming embedded in expectations.
The euro fell in reaction to the inflation figures, from about $1.0620 to $1.0584. That’s a sign that traders think the figures make it more likely that the ECB’ will be bold in its decision on expanding stimulus.
Inflation in the Eurozone, as well as many parts of the world, has been low for more than a year, largely because oil and commodity prices have fallen sharply in financial markets.
Among many knock-on effects, that’s led to lower domestic energy bills, falling prices at the pump and subdued costs for businesses. Weak economic growth in large parts of the Eurozone has also failed to push up wages, which is one triedand-trusted way of generating inflation. Inflation could start rising in the next few months because last year’s drop in energy prices falls out of the annual comparison. Still, with the Eurozone economy still sluggish, few economists think wages will grow strongly and as such inflation is expected to remain below target for some time yet.
The euro weakened after reports showing inflation in the region fell short of analyst estimates and US hiring jumped, kicking off three days of economic events likely to set the course for global markets into 2016.
Europe’s 19-nation shared currency approached its weakest level since April as the consumer-price data boosted the argument for extra monetary stimulus when the European Central Bank meets this week. Treasuries extended losses after the ADP Research Institute’s jobs report and as investors awaited speeches by Federal Reserve Chair Janet Yellen. European equities and US stock-index futures were little changed as mining companies sank.
The euro dropped 0.4 per cent to $1.0586 at 8:27am. New York time. West Texas Intermediate crude declined 1.6 per cent to $41.18 a barrel and Treasury 10-year note yields increased four basis points to 2.18 per cent. The Stoxx Europe 600 Index was 0.1 per cent higher after rising as much as 0.6 per cent.