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 Consumer prices in the 18 countries using the euro rose by just 0.3
percent year-on-year in August, the smallest increase since October
2009, the European Union's statistics office Eurostat said. The
number matched market expectations.
The ECB targets an inflation rate at below-but-close to 2 percent
over the medium term, a level not seen since the first quarter of
2013. It also considers anything below 1 percent over time to be in
a "danger zone".
Inflation moving ever closer toward zero, a stagnating economy, a
double-digit unemployment rate and increasing signs of reform
fatigue among euro zone governments are posing a tough challenge for
the ECB that it says it cannot solve alone.
In a landmark speech at a central banker gathering in Jackson Hole
last week, ECB President Mario Draghi said it would be "helpful for
the overall stance of policy" if fiscal policy could play a greater
role alongside the ECB's monetary policy.
He got backing on Thursday from German Finance Minister Wolfgang
Schaeuble, who told Bloomberg that monetary policy could only buy
time and had run out of tools, calling instead for more investment
without running excessive deficits.
Others believe the ECB should do more to stimulate growth.
"This is yet another bad indicator of the health of the euro zone
economy," said Aberdeen Asset Management Investment Manager Luke
Bartholomew. "We are now relying on Draghi the politician not Draghi
the economist to get Europe out of this mess."
"He is walking a tightrope between conservative European
institutions and the markets desire for more stimulus. But as every
month passes we get closer to the dread of deflation and Draghi
looks more and more like Nero fiddling while Rome burns."
The euro rose to the day's high of $1.3195 <EUR=> as investors
trimmed bets against the currency after the data and German Bund
futures fell.
The drop in August inflation was led by a 2.0-percent decline in the
highly volatile prices of energy. Prices of food, alcohol and
tobacco fell by 0.3 percent for a second month in a row in August.
Core inflation, which strips out such volatile components, rose to
0.9 percent from 0.8 percent.
"Core inflation resilience at just below 1 percent confirms that
outright deflation remains unlikely," said Marco Valli, chief euro
zone economist at UniCredit.
In a separate data release Eurostat said that unemployment in the
euro zone was, as expected unchanged at 11.5 percent for a second
months in a row in July, leaving 18.4 million people without jobs in
the 9.6 trillion euro economy.
ONLY WORDS, NO ACTION
Attention now shifts to the ECB's September policy meeting next
Thursday where the inflation reading is set to liven up the debate
in the Governing Council. Analysts expect a more serious discussion
about possible large-scale asset purchases.
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Commerzbank now sees a 60-percent chance that the ECB will embark on
quantitative easing (QE) in the next 12 months , spending billions
of euros on private and sovereign debt to boost growth and
inflation, up from an earlier 40 percent.
"QE is now our baseline scenario," said Commerzbank economist Joerg
Kraemer, mainly because of the weakening growth prospects for the
currency bloc, although he does not expect the ECB to take fresh
action on Thursday.
"We expect at best a modification in the wording compared with the
August meeting rather than ECB action," he said.
Sources told Reuters on Wednesday that new action on Thursday was
unlikely but not impossible.
A Reuters poll on Thursday put a 40-percent chance on the ECB
conducting QE through the purchase of sovereign bonds by March next
year.
ECB policymakers have said in recent weeks the ECB wanted to see the
impact of its June stimulus package first before considering further
steps. It will offer banks new four-year loans from September and
may decide to buy securitised loans.
Expectations the ECB could activate QE, its most powerful tool yet,
intensified after Draghi's Jackson Hole speech in which he said
financial markets indicated a "significant decline at all horizons"
in inflation expectations, adding the ECB would use "all the
available instruments" to ensure price stability.
Such a step is, however, highly contested by some ECB Governing
Council members, who worry about moral hazard, while others question
the effectiveness of such a policy tool that is likely to cost the
ECB billions of euros.
(Reporting by Martin Santa and Eva Taylor, Editing by Jeremy Gaunt)
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