Euro-Area Prices Drop for 2nd Month Before ECB Beefs Up QE

  • Consumer prices fall 0.1%, core inflation at 1% in March
  • ECB will increase asset purchases starting on Friday

Euro-area inflation was negative for a second month in March, in data released on the eve of the European Central Bank’s first day of expanded debt purchasing to fight deflation.

The consumer price index in the 19-nation bloc fell 0.1 percent from a year earlier after a 0.2 percent drop in February, according to data published Thursday. That matches the median prediction in a Bloomberg survey of economists. Core inflation, which strips out volatile elements such as food and energy, was at 1 percent, up from 0.8 percent in the prior month.

“We have seen energy putting a lot of downward pressure on headline inflation,” said Marco Valli, chief euro-area economist at UniCredit Bank AG in Milan. “Monetary policy cannot do it all, but in the short term it’s basically the only game in town. That’s how it is now, and probably how it will be if a further shock hits the economy in next months.”

The ECB will on Friday beef up monthly bond purchases to 80 billion euros ($91 billion) from 60 billion euros, after President Mario Draghi this month unveiled a raft of new measures to spur price growth, including lowering its deposit interest rate deeper into negative territory. Inflation hasn’t come near the ECB’s goal of just under 2 percent since 2013, and a moderate economic recovery has been insufficient to counteract falling oil costs.

An index of executive and consumer confidence in the euro area slumped for a third month to its lowest level in more than a year in March, the European Commission in Brussels said on Wednesday. Data on Friday will probably show the region’s unemployment rate remained unchanged at 10.3 percent in February, according to economists in a Bloomberg survey.

The euro-wide number follows low readings in the region’s biggest economies. In Germany, the European Union-harmonized inflation rate rose to 0.1 percent from minus 0.2 percent, according to data released Wednesday. The rate in France was minus 0.1 percent, while Spanish prices fell 1 percent.

Negative Rates

The “recovery of the core inflation rate is a relief to policy makers, who fear that low energy prices are causing a negative spiral of prices and wages,” said Bert Colijn, an economist at ING in Amsterdam. “This release shows that the trend in core inflation remains stagnant, so at least it is not moving towards deflation.”

Central bankers around the world been boosting monetary stimulus measures or slowing the pace of tightening in response to volatility in financial markets. Draghi’s asset purchase plan is driving down government bond yields as investors face even higher demand, with supply unable to keep up.

“One of the aims of negative interest rates was to push investors further down the risk spectrum into other assets and boost their prices,” Stewart Robertson, an economist at Aviva Investors, said in a Bloomberg TV interview with Manus Cranny and Anna Edwards. “That hasn’t really happened.”

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