Euro inflation slows further

Euro-area inflation slowed more than economists forecast in May, cranking up pressure on the European Central Bank to deploy measures as soon as this week to kindle prices and drive growth.

The rate fell to 0.5% from 0.7% in April, the European Union’s statistics office in Luxembourg said.

With ECB president Mario Draghi warning about the risk of a negative price spiral, the Governing Council is considering measures from negative interest rates to conditional liquidity for banks. The central bank is also contending with high unemployment, which unexpectedly decreased in April while remaining near a record, a separate Eurostat report showed.

“It’s a surprise, but not enough of a surprise to change materially the global economic outlook that the ECB will release on Thursday,” said Michel Martinez, an economist at Societe Generale in Paris. “What seems highly likely is that the ECB will cut key rates and probably also inject further liquidity.”

The ECB has prepared investors for the prospect of stimulus when it announces the rate decisions tomorrow. “We are ready to act,” ECB vice president Vitor Constancio said on May 30.

“We are not complacent about the risks from a protracted period of low inflation.”

“The ECB will announce rate cuts, including the deposit rate into negative territory,” said Martinez, who was one of the few economists accurately to forecast the May inflation rate in Bloomberg’s survey.

- Bloomberg