Prices in the eurozone have fallen in February.
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 grow back to its pre-crisis size.
“Deflation would be a disaster for the eurozone 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 10 March, 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 fell to -0.2 per cent from 0.3 per cent a month earlier, far from the bank’s target of close to two per cent 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 per cent from one per cent.
Bank of France governor Francois Villeroy de Galhau, an influential member of the ECB’s Governing Council, warned that the central bank would have to act if the low energy prices had long-term effects.
The worrisome inflation print comes just days after the G20 meeting of the world’s top economies warned that leaders needed to look beyond ultra-low interest rates and printing money to shake the global economy out of its torpor.
Still, the meeting failed to outline any bold steps and even called on central banks to maintain accommodating policies as weak Chinese growth weighs on all top economies and low commodity prices raise the spectre of deflation.
“The inflation data puts more pressure on them to do something. Unfortunately, the number of instruments for them is not increasing.” David Kohl, an economist at Julius Baer, said. The ECB is expected to cut its deposit rate by 10 basis points to -0.4 per cent in March, charging banks even more to park their cash overnight. Although consumer spending, virtually the only engine of growth, is holding up relatively well, an array of weak business sentiment surveys and poor PMI data indicate that the 19-member currency bloc is increasingly suffering from the emerging markets slowdown.
The European Commission reported on Friday that overall eurozone economic sentiment deteriorated by far more than expected in February, falling to 103.8, just above the long-term average, from a slightly upwardly revised 105.1 in January. The consumer confidence index, meanwhile, dropped to -8.8 from -6.3 in January, down from -5.7 in December – a poor harbinger for future spending, last year’s bright spot.
The ECB is also likely to fret over falling share prices, especially in the case of banks, as market volatility could increase the cost of capital for lenders, holding back credit and essentially reversing the effect of quantitative easing.
The ECB is already buying assets to the tune of €60 billion, hoping to boost lending, growth and prices but it 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.
Indeed, eurozone long-term inflation expectations – as measured by the five-year, five-year eurozone breakeven forward – are at record lows below 1.4 per cent, suggesting that markets lack confidence in the ECB’s ability to fulfil its mandate.