Inflation in the euro zone sunk to its lowest since November 2009, fuelling speculation that the European Central Bank will take radical measures to prevent deflation from spiralling out of control.
Yearly consumer inflation in the economic bloc fell to 0.5 percent in March, down from 0.7 percent in February, according to the European Union’s statistics office Eurostat today. This lagged the median estimate of 0.6 percent reading in a Reuters’ poll of economists.
However, the euro zone is yet to sink to the levels of deflation witnessed in Japan in the 1990s, when prices plunged, weakening demand and resulted in wage cuts and further price cuts. Nonetheless, EU’s low inflation rate points to a fragile economy.
The inflation has persistently stayed under 1 percent, which the ECB terms as a “danger zone”. This increases the possibility that ECB will slash interest rates when the body’s Governing Council convenes on Thursday. Investors have also speculated that it may also roll out other measures such as U.S. asset-purchase program or even negative deposit rates.
“This will keep the possibility of further monetary policy easing very much alive,” Nick Kounis, who heads economic research department at ABN AMRO in Amsterdam, told Reuters. “Nevertheless, the central bank has shown quite some tolerance for low inflation recently.”
The ECB, which aims to bring inflation to nearly 2 percent, let the borrowing costs remain 0.25 percent this month, and said the risks of deflation remain limited. However, prices in countries within the bloc such as Greece, Cyprus, and Ireland have fallen over the past months.
However, overall price increases excluding the energy sector in the whole bloc were very marginal, indicating demand is still weak.
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