The pressure on the European Central Bank (ECB) to cut interest rates again ratcheted up on Friday after figures showed inflation unexpectedly falling further below its target.
Consumer price inflation in the 18-country eurozone fell to 0.7 percent in the year to last month from 0.8 percent the previous month, the Eurostat agency said.
The decline was unexpected — the consensus for a rise to 0.9 percent — and reinforced fears that the eurozone is about to suffer a Japanese-style bout of deflation that would further hobble the stagnant recovery. Once prices start to fall, economies can become moribund as consumers delay purchases in the hope of getting bargains later and businesses postpone investment and innovations.
The ECB will hold its monthly meeting on Thursday and a growing number of economists think it may ease monetary policy soon in response to these deflation fears. Some economists think the central bank’s Governing Council will reduce its main interest rate to 0.10 percent from the current record low of 0.25 percent to stimulate demand, but other analysts reckon the ECB will hold off for a month at least, mainly because other economic indicators have been more upbeat of late.
Though the eurozone economy grew by a quarterly rate of only 0.1 percent in the third quarter of last year, recent surveys on confidence among businesses and consumers have suggested that growth may be picking up even in those countries that have been bailed out, such as Portugal and Spain. Also, the drop in inflation was largely due to falling energy costs, which may, for example, free up money for cash-strapped households.
However, economic conditions vary greatly across the region, making it difficult to set interest rates at an appropriate level for different economies. While countries like Germany and Austria have unemployment rates around 5 percent, Greece and Spain still need support as they have more than one in four people out of work.
The ECB has insisted that it can only do so much. Governments have to continue getting their public finances in order and push ahead with reforms to their economies.
However, the central bank does have some tools besides rate cuts at its disposal. ECB President Mario Draghi has said the bank is considering all its options.
The ECB could, among other things, make the deposit rate negative, a move that would essentially make banks pay to have their money parked at the central bank. That, the theory goes, may make them lend more, which would shore up economic activity and stimulate inflation.
The ECB could also offer banks another round of long-term loans, though recent comments from Draghi suggest that is not imminent. A US-style monetary stimulus, in which the amount of money in the economy is increased, is considered a long-shot, largely because of Germany’s historic reluctance.