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ECB action could be 'too little, too late' as eurozone inflation slows to 0.5 per cent

Disappointing inflation figures mean we’re likely to see some action this month, but will it make a difference?
Jun 3rd 2014, 2:33 PM 11,463 61

NEW FIGURES RELEASED by Eurostat show that inflation in the eurozone dropped to 0.5 per cent last month, down from 0.7 per cent in April.

The latest slowdown in price expansion will add to calls on the European Central Bank to take action to drive inflation up.

Last month, ECB president Mario Draghi said that some action is likely in June. Possible options mooted include a further cut in the overall interest rate, or a less-likely quantitative easing package.

The flash statistics for May are not broken down by country, but show that the biggest gains were in the services sector, where prices increased by 1.1 per cent.

Slow growth in energy prices and the food alcohol and tobacco sectors were the main drag on inflation, with prices rising by 0.7 per cent when those items were excluded.

Low German rates

Inflation in Germany fell to its lowest level since 2009, with analysts predicting that this could force the hand of the Bundesbank, which has traditionally been hostile to interfering using monetary instruments.

Katie Evans of the Centre for Economics and Business Research in London wrote:

“(Low inflation) may tame the hawkish bite of Bundesbank president Jens Weidmann, and increases the likelihood of policy intervention.”

She continued: “Given the continued weakness in today’s data, the ECB is widely expected to cut interest rates to a level below zero this week, meaning banks will be charged to hold reserves there.”

An interest rate cut is designed to discourage banks to hold cash balances and force them to lend more money into the economy.

For countries like Ireland with high debt levels, inflation is generally seen as a positive as it reduces the real value of servicing the debt.

Too little, too late

However, Evans was slow to praise the likely ECB action, saying:

This cut is probably too little too late, and will have a minimal impact on the Eurozone’s economic outlook.

Cebr said that a push to use instruments known as long-term refinancing options, which provide banks with an extra comfort zone of liquidity to back their lending, to encourage loans to the SME sector, would be welcome.

Eurostat data for April showed Ireland posting an inflation rate of 0.3 per cent, 0.4 per cent behind the bloc’s average of 0.8 per cent.

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Jack Horgan-Jones

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