UPDATE 1-Euro zone inflation steady in August, easing pressure on ECB

31 Aug 2015 | Author: | No comments yet »

Euro zone inflation steady in August, easing pressure on ECB.

BRUSSELS/ FRANKFURT (Reuters) – With low price inflation serving as a reminder of the euro zone’s delicate health, the European Central Bank is having to reassure market investors that it can do yet more to help the economy. Annual inflation in the euro zone was the same in August as in July, defying economists’ expectations of a slowdown, as rising prices of unprocessed food and services offset some of the downward pull from cheaper energy. 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.

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. Policy-setters in Frankfurt, who warn that falling oil has skewed this result, point to a measure the ECB calls core inflation as proof that a one-trillion-euro-plus money printing programme is having an impact. He expected no action from the ECB despite fears about China’s economy that could affect growth prospects in Europe but said ECB President Mario Draghi might stress that the ECB is ready to act if inflation dips further or fails to pick up. 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.

Inflation growth rates are also set to change later this year as the difference between the price of oil now and in 2014, when it started to fall from June, becomes less stark. Oil prices have fallen from above $60 a barrel in early July to around $43 last week and economists said the effects of that fall may not be fully visible yet. “It may be that the latest plunge in commodity and energy prices is not yet fully reflected in inflation data,” said Carsten Brzeski, economist at ING. 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 was little changed at 0.73 percent as of 12:52 p.m. 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. 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.

When asked in a poll by Reuters last week if the ECB had any viable alternatives to its current asset-buying scheme if serious economic weakness were to reappear, the answer was a resounding “No” from 34 of 46 analysts. Those who thought there was an alternative listed politically difficult things such as buying equities, and vague things such as more “forward guidance”. For now, the stablisation in inflation in August, which follows a dramatic earlier slump over more than two years, puts the ECB under no immediate pressure to act when its governing council meets this week. 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.”

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