Pressure on ECB Mounts as Euro-Area Inflation Revised Lower

  • January consumer prices rose annual 0.3% vs 0.4% first est.
  • ECB may boost stimulus in March to combat anemic outlook

Euro-area consumer prices rose less than initially estimated in January, increasing the pressure on the European Central Bank to take steps to sustain the region’s recovery.

The inflation rate was 0.3 percent, less than the 0.4 percent reported on Jan. 29, data from the European Union’s statistics office showed on Thursday. ECB policy makers will review their stimulus package at a monetary-policy meeting on March 9-10, when they’ll also release revised economic projections.

A commodity slump and a China-led emerging-market slowdown are weighing on global growth and damping price pressures. That’s making the ECB’s medium-term inflation goal of just under 2 percent harder to achieve, despite unprecedented measures including negative interest rates and a 1.5 trillion-euro ($1.7 trillion) bond-buying program.

While the revision wasn’t major, persistent weakness “probably hurts long-term inflation expectations,” said Jean-Francois Perrin, an inflation strategist at Credit Agricole SA’s corporate and investment bank unit in Paris. “It means clearly the ECB is not fulfilling its mandate in regard to inflation right now.”

The euro fluctuated after the report and was little changed at $1.1019 at 11:39 a.m. Frankfurt time.

Thorough Review

While inflation in January was still higher than the 0.2 percent registered the previous month, policy makers have said the rate may turn negative in coming months. Core prices, which strip out volatile components such as fuel, rose an annual 1 percent last month from 0.9 percent in December, Eurostat said. Energy costs declined 5.4 percent. An initial estimate for this month’s inflation is due on Feb. 29.

Governing Council member Jens Weidmann, who has been reluctant to bolster stimulus so far, said on Wednesday it is “clear that the current price developments warrant a thorough monetary-policy debate.”

While noting that no decision has yet been made on whether further action is needed, he warned that any fresh measures must avoid being counterproductive. With investors pricing in at least a 10-basis point cut in the deposit rate, currently at minus 0.3 percent, concern is mounting that a squeeze on bank profits will hinder lending. Some economist estimates predict an expansion of the bond-purchase plan would run into liquidity constraints.

Bank Mitigation

“If through the effect on, for instance, the stability of banks our measures produce the opposite of what we want then it wouldn’t be smart to embrace them in the first place,” Weidmann, who heads Germany’s Bundesbank, said in a Bloomberg Television interview in Frankfurt. “We have to design our measures in a way to make sure they are powerful and they are effective.”

ECB Vice President Vitor Constancio said last week that any easing should “mitigate the effect on banks.” He declined to elaborate on what that might mean. Central banks in Switzerland and Denmark have structured their negative deposit rates to provide exemptions for lenders up to certain amounts.