The inflation rate across the 18-country eurozone languished at a low of 0.5 percent last month, official figures showed yesterday, adding urgency to the European Central Bank’s (ECB) recently announced measures to help the economy.
Some economists warn the persistently low inflation rate can hurt growth. In a worst case, an extended drop in prices could cause a deflationary spiral, which can choke off growth and take years — if not decades to break out of.
While the bank does not expect deflation, it is worried about low inflation. That spurred it to announce at its last meeting last month a raft of aggressive measures to improve the flow of credit and money in the financial system.
Despite yesterday’s evidence that inflation remains low, analysts do not expect the ECB to take further action at its next rate-setting meeting this week.
“The ECB is clearly going to sit tight for now, at least while the interest rates and liquidity measures it announced at its June meeting increasingly kick in,” Howard Archer of IHS Global Insight said.
Analysts were on average expecting inflation to edge up to 0.6 percent, according to financial data provider FactSet.
A closer look at the figures released by the EU’s statistics agency shows the core inflation rate, which excludes volatile food and fuel costs, rose slightly to 0.8 percent from 0.7 percent in May.
The bank wants the headline inflation rate to be just under 2 percent.
Should it continue to undershoot expectations, some experts believe the bank will have to take the aggressive step of pumping newly created money into the economy.
Such a program, called quantitative easing, has been adopted with some success by the US Federal Reserve, but remains a complex issue in the eurozone, as the bank would likely face significant practical hurdles and legal challenges.
Under the program, the central bank would have to buy bonds or other financial assets on a large scale with new money.
Analyst Jennifer McKeown of Capital Economics said the latest inflation reading “will add to pressure on the ECB to provide more policy support, particularly given recent signs that the recovery may already be slowing.”
The low inflation is expected ultimately to push the bank toward implementing such a program of large-scale bond purchases “to tackle the risk of deflation,” McKeown added.
At the meeting last month, the bank decided to lower its benchmark interest rate to 0.15 percent and cut another rate into negative territory for the first time.
On top of that, it promised billions of dollars in cheap loans for banks on condition that they lend more to businesses.
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