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Eurozone inflation down again but ECB seen on hold

By Juergen Baetz

Associated Press

Published: Thursday, July 31 2014 7:43 a.m. MDT

Updated: Thursday, July 31 2014 7:43 a.m. MDT

In this picture taken while turning the camera the Euro sculpture stands in front of the European Central Bank in Frankfurt, Germany, Tuesday, March 18, 2014.

Michael Probst, Associated Press

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BRUSSELS — The inflation rate in the 18-nation eurozone dropped again in July, official data showed Thursday, in a worrying sign that adds pressure on the European Central Bank to beef up its efforts to spur the economy.

In a preliminary estimate, Eurostat, the European Union's statistical agency, said inflation fell to 0.4 percent from the previous month's 0.5 percent, where analysts had predicted it would remain. Inflation is at its lowest reading since October 2009, when the world economy was hit by a raging financial crisis that caused severe recessions.

And yet, the ECB is expected to hold its nerve at its policy meeting next week and not loosen monetary policy further. Rather, it is likely to monitor the impact of stimulus measures it unveiled in June as well as small improvements elsewhere in the economy, such as a drop in the unemployment rate also announced Thursday.

Low inflation is a worry because it can lead to deflation, in which falling prices choke off growth. Escaping from deflation can take years, if not decades, as in Japan's case.

"The ECB has more work to do to tackle the risk of deflation," said analyst Jonathan Loynes of Capital Economics.

The ECB has already cut interest rates and vowed to get inflation back toward the 2 percent target within two years. But it has so far refrained from the bolder step of large-scale asset purchases, a policy that other major central banks like the U.S. Federal Reserve have used with some success.

The drop in the overall inflation rate is partly attributable to a fall in energy prices, which are volatile. In fact, the core inflation rate, which excludes volatile food and fuel costs, remained unchanged on the month at 0.8 percent.

Thursday's figures nevertheless come as "a blow for the ECB," especially since the economic outlook remains weak, suggesting inflation is unlikely to rise anytime soon, said analyst Howard Archer of IHS Global Insight.

"There is undeniably a very real risk that eurozone consumer price inflation could go lower still ... barring an appreciable rise in oil and gas prices resulting from geopolitical factors hitting supplies," he said, referring to the current tension with Russia, which is a major oil and gas supplier for Europe.

Most analysts, however, didn't expect the ECB to announce new measures at its upcoming rate-setting meeting next Thursday.

The ECB in June already cut its benchmark interest rate to 0.15 percent and cut another rate into negative territory for the first time to counter the threat posed by low inflation. It also promised billions in cheap loans for banks on condition they lend more to businesses.

Analysts say the next step to help shore up the bloc's economy, if needed, would be launching a program of asset purchases. That involves injecting new money into the economy by buying large amounts of bonds and other financial assets.

Judging by the market reaction, investors did not expect the ECB to start that kind of stimulus anytime soon. The euro, which typically weakens on the prospect of looser monetary policy, was steady after the data.

The eurozone officially came out of recession in last year's second quarter, but growth remains weak. Output grew by only 0.2 percent in the first quarter from the previous three-month period.

In more upbeat data, the eurozone's unemployment rate fell slightly from 11.6 percent in May to 11.5 percent in June, its lowest value since September 2012, Eurostat said. The drop beat analysts' consensus expectations, which forecast the jobless rate to stay flat, according to data service FactSet. The number of jobless in the eurozone fell by 150,000 to 18.4 million in the eurozone, which encompasses 330 million people.

Bright news came from some of the countries that had been worst-hit by Europe's debt crisis, with Portugal and Spain both seeing their high unemployment rates falling, respectively, to 14.1 percent and 24.5 percent. However, about one in two youth aged below 25 still remained jobless in Greece, Spain and Italy.

For the wider 28-nation EU, which includes members like Britain and Poland that don't use the euro currency, unemployment dipped from 10.3 percent to 10.2 percent. That's still high compared with the United States, where unemployment is around 6 percent.

Follow Juergen Baetz on Twitter at http://www.twitter.com/jbaetz

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