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Eurozone inflation drop adds pressure on ECB

BRUSSELS (AP) -- Inflation across the 18-country eurozone fell again in March to reach its lowest level in over four years, piling pressure on the European Central Bank to ease its monetary policies further.

The annual inflation rate fell for the third consecutive month, to 0.5 percent from 0.7 percent in February, the European Union's statistics agency said Monday. Analysts were forecasting a milder drop to 0.6 percent.

Inflation was last at this level in November 2009 _ when the global financial crisis had pushed Europe into recession.

The drop raises the prospect that the eurozone might see consumer prices fall. A sustained drop in prices, called deflation, can choke off growth as consumers and businesses delay purchases in hopes of getting better bargains down the line.

That could push the ECB, which aims to keep inflation just below 2 percent, to loosen its monetary policy further at its monthly meeting Thursday.

“The ECB may have little option but to take further policy action,” said analyst Ben May of Capital Economics.

The core inflation rate _ excluding volatile food and energy costs _ also dropped, from 1 percent in February to 0.8 percent in March, according to the Eurostat agency. In February, an uptick in the core inflation rate was cited as evidence dismissing the prospect of looming deflation.

The drop in inflation came on the heels of weaker national data published last week showing, among others, that prices had started falling in Spain, the bloc's fourth-largest economy.

The dip in inflation also comes at a time when the euro has been buoyant in foreign exchange markets. A higher currency can push inflation down in two ways: It can make imports cheaper and weigh on economic activity by making exports more expensive on international markets.

Market reaction, however, was mild, with the euro actually rising after the figures' release on Monday. A currency usually weakens on the prospect of looser monetary policy.

Some analysts cautioned the March drop in inflation can partially be attributed to the timing of Easter, which falls into April this year, a month later than in 2013. That might cause the inflation rate for some seasonal goods and services, such as holidays and air fares, to be unusually low, with a possible rebound in April on the horizon.

The ECB has also said it was ready for a period of low inflation. In February, it trimmed its inflation forecast for this year to 1 percent, insisting however that it doesn't expect deflation as the economic recovery slowly gains strength.

However, most economists say Monday's data adds pressure on the central bank to act in the medium term.

“At its meeting on Thursday we would expect the ECB to at least shift its language to acknowledge that the current trend in prices is of concern,” said analyst Tom Rogers of Ernst & Young.

Interest rates are already at a record-low of 0.25 percent, so some analysts argue the bank could resort to less conventional measures to ease its monetary policy.

Among the possibilities cited is a new round of cheap loans to banks. A more far-reaching measure would be large-scale purchases of financial assets such as government bonds with newly created money, as the U.S. Federal Reserve has done.

That would increase the amount of money in the economy and aim to lower market interest rates and stoke inflation. But such a move faces legal, political and technical obstacles.

The ECB could also trim its deposit rate below zero, effectively penalizing banks for holding money at the ECB instead of lending it out in the economy.


Follow Juergen Baetz on Twitter at http://www.twitter.com/jbaetz

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