Eurozone Inflation tumbles unexpectedly in February

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Eurozone Inflation tumbles unexpectedly in February
Eurozone Inflation tumbles unexpectedly in February

Eurozone Inflation tumbles unexpectedly in February

The figures released today by the Eurostat statistics agency show that consumer prices were 0.7 percent higher in February than the year before. The latest data has surprised many as it is lower than the expectation which was kept at 0.8 percent initial estimate. A significant decline was seen in the annual rate which fell down to the level it was in October.

In its release, the European Union’s statistics office in Luxembourg said that it is a concern as the low inflation has here for five months now. Market observers believe that if low inflation or deflation continues it can hurt an economy by encouraging consumers and businesses to delay spending in the hope of cheaper bargains further down the line.

There are significant risks involved in low inflation for the Eurozone which is trying to recover from the economic slowdown. It not just discourages employees but also discourages spending which is essential to economic recovery. The latest data released by the Eurostat according to some market observers would also discourage large purchases like cars and homes.

As the inflation rate fell significantly last month, it will further pressurize the European Central Bank (ECB) to defend the currency bloc against falling prices. Earlier, the ECB aimed to keep inflation just below 2 percent; however, it has consistently failed in its own estimates and blamed the strength of the euro for helping to keep prices subdued.

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Draghi May Take Some Steps to Up the Inflation

Earlier in the first week of March, President Mario Draghi had said that the expectation to keep inflation just below 2 percent was based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy, the high degree of unutilized capacity and subdued money and credit creation.

According to the sources in ECB the key interest rates will remain at present or lower levels for an extended period of time. In this regard the bank’s president, Mario Draghi was optimistic at the beginning of the month; however, as the new data shows, his optimism does not seem to have gained any strength.

Though he admitted that he is assessing what ECB can do in the event the recovery stalls or prices do start falling, there are not many options left. Albeit he may further reduce the main interest rate, possibly to 0.10 percent or cut the deposit rate to below zero that may encourage banks to lend rather than park their cash at the central bank.

To contact the reporter of this story: Jonathan Millet at john@forexminute.com