World Economy

Urgent Need for ECB Stimulus Review

Urgent Need for ECB Stimulus ReviewUrgent Need for ECB Stimulus Review

The eurozone’s inflation rate probably slipped back to zero this month, ending a brief run of price gains and adding urgency to the European Central Bank’s review of its stimulus.

The stagnation forecast by economists follows a 0.3% increase in consumer prices in January. The deterioration may not end this month, with ECB policy makers saying that lower oil costs mean that price drops are on the cards in the coming months, Bloomberg reported.

Inflation in the 19-nation zone has fallen short of the ECB’s goal of just under 2% for almost three years, raising concerns that this will depress wages and undermine consumers’ willingness to spend. Against that backdrop, the Governing Council may cut its inflation forecasts at its meeting on March 10 and loosen monetary policy again.

“The eurozone now faces one of the longest periods of zero or negative inflation in its history,” HSBC Holdings economists Fabio Balboni and Rainer Sartoris said in a note on Friday. This “increases the risk that inflation expectations could become dislodged and puts more pressure on the ECB.”

It’s not just headline inflation that’s weakening. Core price growth, which excludes volatile food and energy, probably cooled to 0.9% in February from 1% in January, according to the Bloomberg survey.

The euro-wide number will follow disappointing data from Germany, France and Spain. In Germany, the European Union-harmonized inflation rate dropped to minus 0.2% from 0.4%. The rate in France fell to minus 0.1%, while Spanish prices slid 0.9%. All readings were worse than economists had forecast.

 More Declines

Twenty-one of the 47 economists in the Bloomberg survey forecast a eurozone rate below zero in February. Goldman Sachs sees a minus 0.1% figure and predicts it could go as low as minus 0.6% in the coming months.

To kickstart a revival in inflation, the ECB has already cut its deposit rate to minus 0.3% and is pumping €60 billion ($66 billion) a month into the economy via asset purchases.

Clemens Fuest, incoming president of the Ifo economic institute in Munich, said that loose monetary policy has allowed governments to delay reforms, which could lead to longer-term problems, and the region is “going the Japanese way”. “If you look at inflation, interest, rates, growth, it’s as similar as it can be,” he said in an interview last week. “The eurozone is a different animal from Japan. But the response to the crisis and the economic impact is similar to what happened in Japan.”