Low inflation raises the pressure on ECB to act

Inflation remains stubbornly low in several eurozone states, according to data released yesterday which keeps pressure on the ECB to unveil new steps to stoke the moribund economy.

Price rises in Germany, Europe’s biggest economy, remained at ultra-low levels for the third month in a row in September.

A flash estimate released by federal statistics office Destatis showed German inflation this month stood at just 0.8% year-on-year, unchanged since July. The last time it was lower was in February 2010.

In Belgium, prices fell by 0.12% in September, the first time they have fallen since November 2009.

In Spain, the fourth-largest economy in the eurozone, consumer prices fell for the third month in a row, down 0.3% on a yearly basis.

Inflation has been unusually low across the eurozone, fuelling concern the region could slip into deflation.

Analysts predict that eurozone-wide data, due to be released today, will show an annual inflation rate of 0.3% in September.

“Ultra-low headline inflation and the setback to growth will force the ECB to revise down its... projections for growth and inflation again in December,” said Holger Schmieding at Berenberg.

The ECB earlier this month took drastic measures to spur inflation, taking its refinancing rate down to 0.05% and its deposit rate further into negative territory, to -0.2%.

Financial markets are also hoping that president Mario Draghi will provide more details about the bank’s contested liquidity programmes at its policy meeting on Thursday.

In the long run, analysts expect the ECB to take more drastic measures to pump liquidity into the economy, and push inflation back towards the bank’s annual target of just below 2.0%.

That could include a much wider programme of so-called quantitative easing or the purchase of unlimited amounts of bonds, a policy already practised by other central banks such as the US Federal Reserve and the Bank of England.

“The ECB will soon take the plunge into full-blown quantitative easing,” Jennifer McKeown at Capital Economics predicted.

“But while quantitative easing now seems close to a done deal, we doubt that it will be announced in October.”