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Eurozone inflation in shock March drop

The European Central Bank in Frankfurt am Main.

The European Central Bank in Frankfurt am Main.

Eurozone inflation hit its lowest level since November 2009 in March, a shock drop that raises expectations the European Central Bank will take radical action to stop the threat of deflation in currency bloc.

Annual consumer inflation in the 18 countries sharing the euro was 0.5 per cent in March, with the pace of price rises cooling from February’s 0.7 per cent reading, the EU’s statistics office Eurostat said yesterday.

Economists polled by Reuters had predicted a 0.6 per cent reading – worrying in itself for an economy that is barely pulling out of a record-long recession after a crisis that nearly broke up the currency area.

Inflation has now been in the ECB’s ‘danger zone’ of below one per cent for six consecutive months, and the flash reading increases the chances the ECB will cut interest rates when its Governing Council meets on Thursday. Speculation is also growing that it may employ other easing measures such as a negative deposit rate or even US-style bond-buying.

But this year’s late Easter, which has delayed the impact of rising travel and hotel prices at a time when many people go away in Europe, could encourage the eurozone’s central bank to wait until its June meeting to act.

“This will keep the possibility of further monetary policy easing very much alive,” said Nick Kounis, head of economic research at ABN AMRO in Amsterdam.

“Nevertheless, the central bank has shown quite some tolerance for low inflation recently.”

The ECB, which targets inflation of just below two per cent, left borrowing costs unchanged at 0.25 per cent in March and has argued that deflation risks in the bloc are limited.

ECB President Mario Draghi suggested after the ECB’s March meeting that the bank will either do nothing or take bold action should the outlook deteriorate. He has also said the bank has been preparing additional policy steps to guard against possible deflation, and that the longer inflation remained low, the higher was the probability of deflationary risks emerging.

The relentless trend may focus minds, especially as the head of Germany’s central bank has appeared to soften his long-held resistance to bold steps such as pumping more money into the economy via a bond-buying programme.

“There’s still a case for easing, but we don’t think there’s going to be enough agreement within the Governing Council members to ease on Thursday,” said Guillaume Menuet, an economist at Citigroup in London.

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