BRUSSELS – The inflation rate across the 18-country eurozone languished at a low of 0.5 per cent in June, official figures showed Monday, adding urgency to the European Central Bank’s 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 ECB doesn’t expect deflation, it is worried about low inflation. That spurred it to announce at its last meeting in June a raft of aggressive measures to improve the flow of credit and money in the financial system. Despite Monday’s evidence that inflation remains low, analysts don’t 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,” said Howard Archer of IHS Global Insight.
Analysts were on average expecting inflation to edge up to 0.6 per cent, according to financial data provider FactSet. A closer look at the figures released by the European Union’s statistics agency shows the core inflation rate, which excludes volatile food and fuel costs, rose slightly to 0.8 per cent from 0.7 per cent in May.
The ECB wants the headline inflation rate to be just under 2 per cent. 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 U.S. Federal Reserve, but remains a complex issue in the eurozone as the ECB 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 will ultimately push the ECB toward implementing such a program of large-scale bond purchases “to tackle the risk of deflation,” McKeown added.
At the June meeting, the ECB decided to lower it benchmark interest rate to 0.15 per cent and cut another rate into negative territory for the first time. On top of that, it promised billions in cheap loans for banks on condition they lend more to businesses.
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