Euro zone’s lurch into deflation seen spurring ECB bond-buying

9 Jan 2015 | Author: | No comments yet »

Euro-Area Prices Fall More Than Forecast as Deflation Risks Gain.

The inflation rate in the euro area fell below zero for the first time in more than five years, bolstering the case for more European Central Bank stimulus.BRUSSELS (Reuters) – Euro zone consumer prices fell by more than expected in December because of much cheaper energy, a first estimate by the European statistic office showed in data that is likely to trigger the European Central Bank’s government bond buying programme.The euro has been given another push down by the latest eurozone inflation data and mounting concerns over the looming Greek elections, falling for a ninth day – the longest uninterrupted period of declines since October 1993. The common currency has today slid another 0.9 per cent against the greenback – its biggest decline in three weeks – to trade at $1.18, a fresh nine-year low.

Data out earlier today indicated that eurozone inflation fell to a six-year low of minus 0.2 per cent in December, from a barely positive 0.3 per cent in November and a steeper slump in the annual rate than economists expected. ECB officials are working on a plan to buy government bonds as they strive to prevent a deflationary spiral of falling prices and households postponing spending, a risk President Mario Draghi has said can’t be “entirely excluded.” They may use a gathering today to weigh options for a quantitative-easing program that may be announced at their Jan. 22 policy meeting. “Inflation will most likely fall even further in January and remain extremely low all year long,” said Evelyn Herrmann, European economist at BNP Paribas SA in London. “We expect the ECB to announce a broad-based asset-purchase program including government bonds.” Joblessness in Italy rose to a record 13.4 percent in November, separate data showed. But energy prices plunged 6.3 percent year-on-year last month and unprocessed food was 1.0 percent cheaper, pulling down the overall index despite a 1.2 percent rise in the cost of services. Mounting expectation that the ECB will widen its bond-buying programme to include sovereign debt has pushed government borrowing costs to record lows, and weighed on the euro. The ECB is concerned that a prolonged period of very low inflation could change inflation expectations of consumers and make them hold back their purchases in the hope of even lower prices, triggering deflation.

Consumer prices are falling on an annual basis in Spain and Greece (GKCPIUHY), while data yesterday showed inflation in Germany at 0.1 percent, its weakest since 2009. Core euro-zone inflation, which strips out volatile items such as energy, food, tobacco and alcohol, increased to 0.8 percent year-on-year in December. While Draghi has warned of a dis-anchoring of inflation expectations and signaled support for QE, Bundesbank President Jens Weidmann favors not acting at this time, arguing that the drop could be a “mini-stimulus package.” ECB Chief Economist Peter Praet told Germany’s Boersen-Zeitung last month that in an environment in which inflation expectations are “extremely fragile,” officials cannot “simply look through” the slide in energy costs. Since June, the ECB has cut interest rates twice, offered cheap long-term loans to banks to jumpstart lending and started a purchase program for asset-backed securities — a decision Weidmann and German Executive Board member Sabine Lautenschlaeger opposed. “If you look at past experience we’ve taken major monetary-policy decisions in a situation where there was no unanimity,” Draghi said after the ECB’s Dec. 4 meeting. “So this is what we have to keep in mind.”

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