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MONEY

Eurozone inflation data raises prospect of fresh ECB stimulus

Mario Draghi, the European Central Bank chairman, is widely expected to unleash a fresh round of economy-boosting measures on Thursday, after news that inflation in the eurozone remained at just 0.1% in November.

City analysts had expected the inflation rate to increase modestly to 0.2%. The continued absence of inflationary pressure, despite the ECB’s €60bn (£42bn) a month bond-buying programme, underscored predictions that Draghi and his colleagues could be set to take more action, and the euro fell sharply against the dollar on the news.

The ECB could extend its quantitative easing (QE) scheme, which is due to end in September 2016, increase its size, and cut the deposit rate on reserves held at the central bank, which already stands at -0.2%.

That means banks in effect have to pay the ECB for holding their cash, a measure aimed at persuading them to lend money out to businesses and consumers instead.

Jonathan Loynes, chief European economist at Capital Economics, said: “November’s weaker-than-expected eurozone consumer prices figures give a final green light for the ECB to both increase the pace of its asset purchases and cut its deposit rate at tomorrow’s policy meeting.”

He added that core inflation, which excludes volatile components such as energy prices, had also dropped, from 1.1% in October to 0.9% in November, suggesting the eurozone economy is hovering close to deflation.

Jasper Lawler, of CMC Markets, said the weaker-than-expected inflation data, “adds to the case for stronger action from the ECB tomorrow. The data could be the difference-maker for the ECB choosing to increase the size of monthly asset purchases over just extending the end-date of the QE programme.”

Falling prices can be a boon for consumers in the short term, but policymakers are keen to avoid a prolonged period of deflation, which can lead to weak demand becoming entrenched.

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Source: https://www.theguardian.com

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