ECB under mounting pressure to step up eurozone support

Bloc slips into negative inflation for third time in a year prompting fears eurozone is heading for deflation

The European Central Bank is under growing pressure to step up support for the eurozone’s flagging economy after the bloc slipped back into negative inflation in February.

The surprise drop in prices marked the third time in a year that inflation has turned negative, fanning fears that the eurozone is headed for all-out deflation – a sustained period of falling prices. The news cemented market expectations that the ECB would use its meeting next week to inject fresh cash into the single currency bloc and to cut a key interest rate further into negative territory.

Headline inflation dropped to -0.2% in February, down from 0.3% in January, according to an early estimate from statistics office Eurostat. That contrasted with forecasts for a reading of zero in a Reuters poll of economists.

Low energy prices were the main factor behind the drop, but price pressures in other areas of the economy played a part. There was also a drop in core inflation – taken as a guide to underlying price – adding to signs that low inflation was becoming more entrenched as eurozone economies battled with sluggish global demand from a fresh slowdown and the lingering impact of the last financial crisis.

Core inflation, which excludes the more volatile prices of unprocessed food and energy, fell more than expected to 0.8% from 1% in January and was its lowest since April last year.

Economists said the inflation numbers raised questions over the firepower of central banks to revive growth and prices. Deflation concerns central bank policymakers because it can lead to consumers delaying spending in the anticipation of good becoming cheaper, creating a cycle of diminishing demand that hits economic growth.

This year will be the fourth year of inflation undershooting the ECB’s target of close to 2%, said Anatoli Annenkov, economist at French banking group Société Générale. There were no limits to the ECB’s willingness “but clear limits to its effectiveness”, he said. “Despite its best efforts, the ECB’s challenge to break the backbone of lowflation remains a tall order. Looking set to miss its target for a fourth year this year, we expect it to miss it for another four years, at least, without the help of more substantial economic reform. That won’t stop the ECB from doing what it must according to its self-imposed target, but with markets increasingly unconvinced, we are approaching the ‘effective’ limit of the ECB’s tools.”

The inflation figures follow warnings from the IMF and the OECD that governments cannot rely on low interest rates and money-printing programmes to shore up growth. A weekend meeting of finance ministers and central bank chiefs from the G20 group of countries ended with a similar statement that “monetary policy alone cannot lead to balanced growth”. But the policymakers failed to come up with a concrete plan of how they might revive a sluggish world economy.

The Bank of England governor, Mark Carney, used his speech at the Shanghai meeting to insist central bankers still had ammunition left to boost growth. But he too argued for more help from governments.

This week marks seven years of UK interest rates at a record low of 0.5% and Carney has hinted that he is prepared to cut the base rate further but has ruled out following the trend seen in other countries for negative rates, where depositors are effectively charged for parking their money. The Bank of Japan recently joined the ECB, the Danish central bank, the Swedish Riksbank and the Swiss National Bank in cutting rates to below zero to rescue their economies from deflation and the prospect of recession.

The US Federal Reserve raised interest rates in December, amid signs of a strongly growing US economy. But a string of poor economic figures since then raised doubts about any future rate-rises and even prompted some economists to speculate the move could be reversed.

The ECB meets again next week to decide its next move and its chief, Mario Draghi, has already indicated the central bank will announce moves to inject fresh stimulus into the eurozone. Economists expect the Frankfurt-based body to expand its quantitative easing programme – where it pumps money into the economy by buying up assets from financial institutions – and to further cut its deposit rate by 10 basis points to -0.4%. Another reduction in the deposit rate means it would be charging banks more to hold their money overnight.

The weak core inflation figure “pretty much seals the deal on additional monetary easing” at next week’s meeting, said Teunis Brosens at ING bank. “The weakening of core inflation shows the real and present danger that cheap oil will cause low inflation to become ingrained in eurozone price and wage dynamics. This is especially bad for debt-laden households, businesses and governments in Southern Europe, which will have little scope to ‘inflate away’ their debt burden by increasing nominal wages,” Brosens said.

Contributor

Katie Allen

The GuardianTramp

Related Content

Article image
Boost for ECB as eurozone prices turn positive in May
Rebound in oil prices coincided with the European Central Bank’s €1.1tn boost to lending across the eurozone

Phillip Inman Economics correspondent

02, Jun, 2015 @4:49 PM

Article image
ECB unveils €1.1tn QE plan to stimulate eurozone economy
European Central Bank hopes to shore up confidence, boost inflation, and drive down the value of the euro on foreign exchanges

Heather Stewart

22, Jan, 2015 @2:31 PM

Article image
Eurozone gripped by deflation fears as inflation rate hits five-year low
ECB chief Mario Draghi is under pressure to act but experts say immediate measures are unlikely

Katie Allen

29, Aug, 2014 @4:41 PM

Article image
Eurozone inflation edges up – but not enough to ease concerns about deflation
European Central Bank remains under pressure as economists expect renewed downward pressure on inflation

Angela Monaghan

31, Oct, 2014 @5:39 PM

Article image
Global markets rattled over Greece debts as Osborne talks tough on EU in Brussels
British chancellor’s warning about UK referendum on EU membership earns mixed reaction while fears of Greek bankruptcy mount

Ian Traynor in Brussels and Katie Allen

12, May, 2015 @6:03 PM

Article image
Eurozone inflation data raises prospect of fresh ECB stimulus
European Central Bank could expand quantitative easing and cut deposit rate further, while Fed is expected to raise US rates after strong job growth figures

Heather Stewart and Phillip Inman

02, Dec, 2015 @6:40 PM

Article image
IMF urges European Central Bank to mull cutting interest rates below zero
The International Monetary Fund warns deflation in the eurozone is a key new risk for the world economy

Larry Elliott Economics editor

19, Feb, 2014 @7:55 PM

Article image
Mario Draghi hints at ECB rate cut to avoid deflation
European Central Bank may launch 'pre-emptive action' against deflation, and quantitative easing remains an option

Staff and agencies

26, May, 2014 @5:21 PM

Article image
Greece pushed a step closer to eurozone exit after IMF snub
Christine Lagarde’s refusal to allow any delay in bailout repayments heightens fears that the US and Europe are preparing for Greece to leave the euro

Phillip Inman in Washington

16, Apr, 2015 @5:54 PM

Article image
Corporate profits drove up prices last year, says ECB president
Christine Lagarde says without a shift in corporate behaviour, interest rates will need to stay higher for longer

Phillip Inman

27, Jun, 2023 @1:22 PM