July 31 (Bloomberg) -- Euro-area inflation unexpectedly slowed in July to the weakest in almost five years, underscoring the European Central Bank’s concerns that the economy is too feeble to drive price growth.
Inflation was 0.4 percent compared with 0.5 percent in June, the European Union’s statistics office in Luxembourg said today. That is the weakest since October 2009 and below a median forecast of 0.5 percent in a Bloomberg News survey of 42 economists.
Having unleashed an unprecedented round of easing measures, the Frankfurt-based European Central Bank is seeking to rekindle price growth and help the 18-country bloc’s battered economy. For the past 10 months the inflation rate has been weaker than 1 percent, less than half the ECB’s goal, while joblessness has remained stubbornly near an all-time high for months. Adding to the risks are the geopolitical tensions between Russia and Ukraine, and conflicts in the Middle East.
“This is most likely the trough in inflation, and inflation will move slowly upwards from here,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. “It seems unlikely the ECB will take fresh measures to ease policy further -- I don’t see this as a trigger for a large-scale quantitative easing program, as long as this proves the trough.”
The ECB’s announcement last month of a negative deposit rate and a program to improve bank lending is its most significant since since President Mario Draghi announced two years ago he’d do “whatever it takes” to save the euro. The ECB warned the economy could take some time to respond to the barrage of stimulus and even left open the door for further action. Policy makers are next scheduled to meet on Aug. 7 in Frankfurt.
The euro traded at 1.3386 per dollar at 11:50 a.m. in Frankfurt, little changed from yesterday.
While the ECB’s measures have helped push the average yield on bonds from Europe’s most-indebted nations to a record low, they have not yet boosted prices, growth and lending.
The unemployment rate unexpectedly fell in June to 11.5 percent from 11.6 percent in May, Eurostat said today. While that’s still near a record high, it is less than economists’ forecast of 11.6 percent. Joblessness continued to vary widely across the euro area in June, from a low of 5 percent in Austria to 24.5 percent in Spain.
“What will be key is more of an economic recovery,” said Johannes Gareis, economist at Natixis in Frankfurt. “It’s clear that inflation will stay under 1 percent for this year, because the output gap and the spare capacity in the labor market are so big that they can’t exert much upwards pressure on prices.”
The ECB predicts economic growth of 1 percent this year, rising to 1.8 percent in 2016. It sees inflation at 0.7 percent for 2014, rising to 1.1 percent in 2015 and 1.4 percent in 2016.
For July, the core inflation rate, which excludes volatile items such as energy, food, alcohol and tobacco, clocked in at 0.8 percent, unchanged from the previous month. The cost of services rose 1.3 percent.
In a sign growth could pick up, manufacturing and services activity for the region strengthened this month, exceeding economists’ forecasts. Economic confidence also unexpectedly increased, according to an index published by the European Commission in Brussels. Moreover, the ECB said its quarterly lending survey showed banks eased credit standards in the three months through June for the first time in seven years.
Even so, lending to companies and households, which the ECB has identified as key impediment to the recovery, hasn’t yet improved. Loans shrank 1.7 percent in June from a year earlier, recording the 26th consecutive contraction.
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