Eurozone annual inflation rate retreats even further from European Central Bank’s target

3rd June 2014

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Inflation across the Eurozone dropped to 0.5% in May, down from 0.7% in April – well below the European Central Bank’s 2% target, putting further pressure on the body to take decisive action when it meets this week.

According to a flash estimate from Eurostat, the statistical office of the European Union, looking at the main components of euro area inflation, services is expected to have the highest annual rate in May, at 1.1%, compared with 1.6% in April, followed by food, alcohol & tobacco at 0.1%, compared with 0.7% in the previous month.

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In addition, non-energy industrial goods fell to 0%, compared with 0.1% in April, while energy inflation also flat-lined at 0.0%, compared with -1.2% in April.

Inflation has been falling consistently across the 18-country eurozone over the past year, adding to concerns that the embattled region could slip into a period of deflation, where prices continue to slide back.

Disappointing first-quarter economic numbers which saw the region only manage a lower than expected 0.2% growth in the first three months of the year has already placed significant pressure on the ECB to instigate a new programme of monetary policy.

Almost two years have passed since ECB president Mario Draghi’s famous “whatever it takes ” speech, and recently he has asserted that he is comfortable with taking further action to stave off low inflation.

The consensus expectation is that when the ECB meets on Thursday, it will lower the refinancing rate from 0.25% to 0.15% or possibly even to 0.1%. In addition, it is predicted that Draghi, may even cut the zero deposit rate, making it costly to deposit cash with the bank.

Commenting on the figures Anthony David, fund manager, at Aviva Investors says: “Although today’s inflation rate fell back to the recent low of 0.5%, the drop was in line with expectations following yesterday’s unexpected slide in German inflation. We do not anticipate any further objections from the Bundesbank to an additional loosening of monetary policy this Thursday, and expect a cut in both the refinancing and deposit rates. This is largely priced into the market.”

Azad Zangana, European economist at Schroders adds: “Taking the weaker than expected GDP growth figures for the first quarter along with the lower than expected inflation numbers, the European Central Bank is now under pressure to deliver significant policy loosening. The market expects at least a cut in the main policy interest rate, along with a cut to the deposit rate, but will there be anything further to support bank lending and demand across the economy?”

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