Mario Draghi’s deflation challenge looms large

As Mario Draghi prepares to ramp up debt purchases starting Friday in his biggest assault against eurozone deflation risks, he’s about to get another sense of the magnitude of the challenge.

Consumer prices in the currency zone probably fell for a second month in March and the unemployment rate remained in double digits in February, economists have forecast.

Another report is expected to say economic confidence was unchanged in the 19-nation region in March.

Policy makers led by the ECB are expanding monthly asset buying to €80 billion from €60bn and introducing new measures to lift inflation that hasn’t touched their near-2% goal since 2013.

While the economy is growing, it’s not gaining momentum, and a slow decline in unemployment has failed to spur enough demand to counter falling oil costs and ignite price gains.

“The data will confirm that the ECB was right to act, and also may even need to do more in the future,” said Nick Kounis, an economist at ABN Amro Bank in Amsterdam.

“Underlying inflationary pressures are extremely weak and going in the wrong direction,” he said.

Mr Draghi said this month that negative inflation rates may be “unavoidable” in the coming months and it’s “crucial to avoid second-round effects.”

That concern prompted the ECB Governing Council to cut its deposit rate on March 10 and add a new series of long-term loans to banks, which will begin in June.

The expansion of quantitative easing will start April 1.

“The window of action was now, we had a weak start to the year, and we’re seeing that feeding through to the numbers,” said Anatoli Annenkov, senior economist at Societe Generale in London.

He doesn’t expect any additional major ECB action this year, as policy makers wait to see how their new actions feed through to the economy.

Figures out today may give early insight into how businesses and households are reacting to the stimulus announcement.

Economic confidence probably was stable in March, economists forecast, which would keep it at the lowest level since June.

“The key to the ECB for getting inflation back on target is that we do need to see growth really pick up, and the recovery to take it to the next level,” said James Nixon, an economist at Oxford Economics.

“It’s really the corporate sector that’s just sitting around with its hands in its pockets,” he said.

Hiring has continued even amid weak investment, pushing unemployment slowly downward.

Joblessness in Germany, the eurozone’s largest economy, was unchanged at 6.2% in March, economists predict a report tomorrow will show.

For the entire eurozone, February unemployment probably stayed at 10.3%.