Eurozone Inflation Stable at Low Rate of 0.2 Percent

31 Aug 2015 | Author: | No comments yet »

Eurozone inflation remains low in August.

Inflation in the 19-nation eurozone was stable in August at an annual rate of 0.2 percent, an official report shows — another weak figure that may help push the European Central Bank toward doing more economic stimulus. The European Union’s statistics agency, Eurostat, said Monday that a large drop in energy prices made up for increases in the costs of food, alcohol and tobacco, services and industrial goods. Yields on benchmark bunds have stayed below 1 percent since June and slid to as low as 0.51 percent last week as China’s cooling economy and lower commodity prices fueled bets that central bankers around the world will either loosen monetary policy or delay plans to raise interest rates. A prolonged period of low inflation or, worse, an outright drop in consumer prices, is a sign of weak demand and can hurt an economy by encouraging consumers to delay purchases.

The next month, the ECB announced the launch of a program of quantitative easing, under which it would buy more than €1 trillion ($US1.12 trillion) of mostly government bonds. Annual consumer-price growth in the euro region stayed at 0.2 percent this month, the European Union’s statistics office in Luxembourg said in a report on Monday. The ECB has vowed to push up weak inflation and stimulate growth through a 1.1 trillion euro ($1.2 trillion) stimulus program dubbed quantitative easing.

Eurozone consumer prices rose for the first time in six months during May, a minor victory for the ECB in its campaign to avoid a debilitating period of deflation, during which businesses and households might hold back on spending in the expectation that they will get better deals in the future. ECB officials are due to announce their latest interest-rate decision and give updated inflation forecasts on Sept. 3. “I’m quite sure we’ll see a significant reduction in their inflation forecasts, and the interesting question will be whether they maintain their growth outlook,” Marius Daheim, a senior rates strategist at SEB AB in Frankfurt, said before the inflation data were released. “There still are probably a few investors who are moderately betting on yields to drop further.” Germany’s 10-year bund yield fell two basis points, or 0.02 percentage point, to 0.72 percent at 10:06 a.m. The bank is pushing newly printed euros into the economy by purchasing 60 billion euros a month in government and corporate bonds through September 2016.

ECB President Mario Draghi has said the ECB intends to stick with the program until inflation turns up convincingly, implying the stimulus could be continued beyond September next year. Speaking last week, ECB Chief Economist Peter Praet said the risk of a lengthy period of very low inflation in Europe had intensified due to falling commodity prices and slower growth in developing economies such as China. Separately, France’s economy minister said the eurozone’s woes call for a strong eurozone “economic government” with its own budget, and is arguing that preserving Europe’s shared currency will require financial transfers from its strongest countries. In an interview with German daily Sueddeutsche Zeitung, Emmanuel Macron was quoted as saying that a commissioner with far-reaching powers should be put in charge of an “economic government” that would be able to secure financial transfers for countries in crisis or promote reforms. The idea is to help smooth recessions in the eurozone, where sharing a single currency means countries cannot seek other remedies, such as letting their currency devalue to boost exports.

Germany, Europe’s biggest economy, is deeply averse to creating a “transfer union.” But Macron said if eurozone members continue to object to “any form of financial transfer in the currency union, we can forget the euro and the eurozone.” Speaking at the Federal Reserve Bank of Kansas City’s Jackson Hole conference Saturday, Vice President Vitor Constancio said the ECB’s stimulus policies should help bring eurozone inflation back toward the target provided the measures boost demand and bring economic output in Europe back toward its appropriate level But the eurozone’s already modest economic recovery slowed in the second quarter. While that doesn’t appear to have heralded the onset of a more severe downturn, the eurozone’s expansion seems likely to be too weak to quickly lower very high rates of unemployment and give a stronger boost to domestic demand, which would in turn help push prices higher.

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