Europe Economy

Euro zone stuck in deflation despite ECB QE

The fall in consumer prices in the euro zone narrowed in March but remained in deflationary territory, according to latest figures from Eurostat on Thursday morning.

The inflation rate inched up to a reading of -0.1 percent year-on-year, up from -0.2 percent last month. This was in line with expectations of analysts polled by Reuters. While heading in the right direction, the rate is nowhere near the European Central Bank's (ECB) target of close to 2 percent.

Jonathan Loynes, chief European economist at Capital Economics, said the data confirmed "that price pressures in the currency union remain very weak."

"Admittedly, core (excluding energy and food) inflation rose from plus 0.8% to plus 1.0%, reversing the previous month's decline...But country data already released suggest that this may have partly reflected the early timing of Easter raising inflation in some leisure sectors. As such, the increase could be reversed in April," he warned in a note.

"Looking ahead, euro-zone inflation is likely to remain close to zero in the next few months before edging higher in the second half of the year as negative energy effects finally fade," he added.

The data is the first reading of the region's consumer prices since the ECB's decision earlier this month to increase and expand its aggressive monetary stimulus.

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ECB President Mario Draghi unleashed further firepower to its bond-buying program – deciding to cut interest rates further into negative territory and include corporate bonds in its asset purchases – in a further bid to stimulate growth and inflation in the 19-country bloc.

Inflation is a key indicator of economic health with modest price rises signaling a robust economy where consumer demand is not outstripping supply (which would lead to too much inflation). Conversely, deflation – when prices fall – worries economists as shoppers can hold off making purchases in the expectation of further price falls, with the lack of spending creating a downward spiral for the wider economy.

The inflation rate dipped into negative territory in December 2014 for the first time since 2009, which then added pressure on the ECB to launch its own U.S.-style bond buying program.

Pressure on ECB

Despite its 1 trillion euro asset-purchasing program which was launched in March 2015, the rate of inflation remains anemic at best, not helped by a sharp drop in energy prices worldwide since mid-2014.

Gizem Kara, senior European economist at BNP Paribas, warned that overall higher euro zone core inflation in March "will not be the start of a new trend, in our view."

"Beyond some monthly volatility, we expect core inflation to remain in a tight range just below 1 percent year-on-year for the foreseeable future...The ECB, therefore, is likely to come under pressure again to do more. We continue to expect further policy easing, with the asset-purchase program likely to be extended in September."

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