UPDATE 1-Euro zone inflation turns negative, putting pressure on ECB

30 Sep 2015 | Author: | No comments yet »

Euro Drops as Inflation Data Revive Speculation of More ECB QE.

Consumer prices across the 19-country eurozone fell in September for the first time in half a year as energy prices tanked, official figures showed Wednesday in a development that’s likely to ratchet up pressure on the European Central Bank to give the region another dose of stimulus. The 0.1 percent annual decline reported by Eurostat, the EU’s statistics office, was widely anticipated following the recent drop in global oil prices. The European Union’s statistics office Eurostat estimated that consumer prices in the 19 countries sharing the euro fell 0.1 percent year-on-year in September after a 0.1 percent rise in August.

Goldman Sachs said in a note earlier this month that the ECB was likely to continue the program through the end of next year and only end it in mid-2017. The gauge, whose shrinkage last year was cited by ECB President Mario Draghi as one of the justifications for considering unconventional policy measures, is set for the biggest decline since the three months through September 2011. The impact of energy costs is evident in the fact that, when they are stripped out of the calculations, consumer prices were 1 percent in the year to September. Though anticipated, the negative headline rate is likely to be a disappointment to policymakers at the ECB who earlier this year launched a 1.1 trillion-euro ($1.2 trillion) stimulus program in the hope of getting inflation back toward target. The ECB wants to keep the headline inflation at below, but close to 2 percent over the medium term and started buying assets including government bonds in March to inject more cash into the economy and in this way accelerate price growth.

But the 1 trillion euro plus programme, called quantitative easing (QE), has so far had limited success because of the sharp declines in the prices of commodities, exacerbated by expectations of slower economic growth in the world’s second biggest economy China. Data “was broadly driven by the energy component,” said Giada Giani, an economist at Citigroup Inc. in London. “There are very little inflationary pressures even aside from the oil-price shock. It weakened the euro, making imports pricier, and it helped boost the economy by making the region’s exports more competitive and keeping borrowing rates low. Falling prices sound good in principle and can be, if temporary — many economists think the current period of weak or negative inflation is a boon to economic activity since it’s largely due to weak oil prices.

Falling prices over a long period of time can prompt consumers to delay spending in hopes of bargains down the line and make businesses reluctant to invest and innovate. Speaking to reporters in Tallinn on Wednesday, Hansson said that “everything is possible” regarding a expansion of the program. “A lot depends on how inflation will develop, if it slows or accelerates,” he said. “The QE program was announced in March, for 19 months, and it has only lasted for six months. Economic confidence unexpectedly increased in September to the highest in more than four years as sentiment in the industrial and services sectors improved.

Separately, Eurostat said unemployment across the region fell by a modest 1,000 in August to 17.60 million, which left the jobless rate unchanged at 11 percent.

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