Euro zone price inflation stays low but stable in June

[June 30, 2014] By Martin Santa and Eva Taylor

BRUSSELS/ FRANKFURT (Reuters) - Euro zone inflation remained stuck at levels last seen during the 2009 recession and lending to companies and households contracted again, data showed on Monday, further highlighting the bloc's feeble economic state.

The reports - for June and May, respectively - underlined the reason for the European Central Bank's unprecedented policy steps earlier in June when it cut interest rates to record lows and promised to hand out more long-term loans to encourage banks to lend more freely.

It will take a while for the measures to take effect and they would not have influenced Monday's releases. Details have not yet been announced for the long-term loans and most economists do not expect any fresh policy steps when the ECB meets on Thursday.

But there is no sign that the pressure on the ECB is easing.

"The ECB has just announced new measures to signal its readiness to bring inflation back to target and boost lending, but it will surely keep the door wide open to more measures at this week's meeting," said Berenberg Bank's Christian Schulz.

Annual euro zone inflation stayed at 0.5 percent in June compared with last month, the European Union's statistics office Eurostat said on Monday. Core annual inflation - excluding energy, food, alcohol and tobacco - inched up to 0.8 percent.
 

This was slightly unexpected after annual inflation in Germany rebounded to 1.0 percent in June, which Berenberg's Schulz said suggested "a widening of the range of inflation rates between the core and the periphery".

Overall, euro zone inflation remains far below the ECB's medium-term target of just below 2 percent and has been stuck in what ECB President Mario Draghi has called the "danger zone" of below 1 percent for nine months in a row.

The ECB is worried that the euro zone's growth prospects will suffer if inflation stays too low for too long.

WEAK LENDING

One of the ECB's main concerns is that banks in euro zone periphery countries are not lending sufficiently to companies and households and at higher rates than in the core countries.

This means the ECB's record low interest rates are not feeding evenly through to the real economy across the euro zone.

In May, Spanish banks lent 10.345 billion euros less to companies and households than in the month before, ECB data showed. Lending by Italian banks declined by 7.843 billion euros and by 567 million euros in Portugal.

German, Finnish and Dutch banks increased lending in May.

The cost of borrowing also differs. While companies have to pay on average 3.65 percent for loans in Spain or even 5.39 percent in Portugal, German or Dutch firms pay around 2.5 percent, ECB data from April showed.

The ECB now plans to give euro zone banks the opportunity to borrow four-year funds from the ECB at possibly 0.25 percent for the four-year term, linking the offer to the size of their loan books, which it hopes will be an incentive to lend more.

The ECB may reveal details for these targeted long-term refinancing operations on Thursday.

It also aims to revive the market for securitized loans in Europe, which collapsed after the financial crisis and never really recovered since. The ECB said in June it had intensified preparations for possible purchases of asset-backed securities.

(editing by John O'Donnell/Jeremy Gaunt)

[© 2014 Thomson Reuters. All rights reserved.]

Copyright 2014 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.