ECB to ease policy as prices drop
Print Edition
PRICES in the eurozone fell in February, falling short of already depressed expectations and virtually ensuring another round of policy easing from the European Central Bank on March 10.
Combined with weak sentiment and output data, the dismal inflation figures suggest that the bloc’s tepid growth is slowing, adding to calls for fiscal and monetary policy action to prop up an economy that has yet to expand back to its pre-crisis size.
“Deflation would be a disaster for the euro area as the burden of high debt would increase,” Nordea economist Holger Sandte said. “Therefore, the ECB will continue easing monetary policy significantly.”
“But no matter what the ECB decides to do on March 10, inflation is likely to hover around zero during the next few months before it picks up — if oil prices behave well,” Sandte added.
Headline inflation, the key indicator watched by the ECB, fell to minus 0.2 percent from 0.3 percent a month earlier, far from the bank’s target of close to 2 percent and below already muted expectations for unchanged prices.
More alarmingly for the ECB, core inflation excluding volatile food and energy prices, dipped to 0.8 percent from 1 percent, suggesting that low oil prices are feeding into the price of other goods and services, creating a so-called second round effect that could entrench low inflation and lead to deflation.
Indeed, Bank of France Governor Francois Villeroy de Galhau, an influential member of the ECB’s Governing Council, warned over the weekend that the central bank would have to act if the low energy prices appeared to have long-term effects.
The ECB is expected to cut its deposit rate by 10 basis points to minus 0.4 percent in March, charging banks even more to park their cash overnight, and investors also expect the bank to beef up it 1.5-trillion-euro (US$1.6 trillion) asset purchase program.
The ECB has acknowledged that its inflation forecasts would have to be cut and its policies reviewed in March given that inflation will not return to target for several more years.
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