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 Annual consumer inflation in the 18 countries sharing the euro was
0.5 percent in March, with the pace of price rises cooling from
February's 0.7 percent reading, the EU's statistics office Eurostat
said on Monday.
Economists polled by Reuters had predicted a 0.6 percent reading — itself worrying for an economy that is barely pulling out of a
record-long recession after a crisis that nearly broke up the
currency area.
The euro zone is far from the deflation that Japan suffered from the
early 1990s, when falling prices weakened demand, leading to wage
cuts and even lower prices, but the bloc's low inflation rate is a
clear sign of economic fragility.
Inflation has now been in the ECB's "danger zone" of below 1 percent
for six consecutive months, and the flash reading increases the
chances the ECB will cut interest rates when its Governing Council
meets on Thursday. Speculation has also grown that it may employ
other easing measures such as a negative deposit rate or even
U.S.-style bond-buying.
But this year's late Easter, which has delayed the impact of rising
travel and hotel prices at a time when many people go away in
Europe, could encourage the euro zone's central bank to wait until
its June meeting to act.
"This will keep the possibility of further monetary policy easing
very much alive," said Nick Kounis, head of economic research at ABN
AMRO in Amsterdam. "Nevertheless, the central bank has shown quite
some tolerance for low inflation recently."
The ECB, which targets inflation of just below 2 percent, left
borrowing costs unchanged at 0.25 percent in March and has argued
that deflation risks in the bloc are limited.
"LOW-FLATION"
Some euro zone members, like Ireland, Cyprus and Greece have
experienced falling prices in recent months. For the bloc as a
whole, price rises for industrial goods outside the energy sector
were very modest in March, a sign demand remains weak.
On Monday, the International Monetary Fund's top European official
said the ECB had more room to cut interest rates to counter risks
from low inflation, although he said the Fund did not see deflation
setting in.
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"We are not so much worried about deflation by itself, but we are
very worried about what we call 'low-flation'," said Reza Moghadam,
Director of the IMF's European Department.
"There is more room for further (ECB) easing, not least because
inflation is under control." ECB President Mario Draghi suggested
after the ECB's March meeting that the bank will either do nothing
or take bold action should the outlook deteriorate.
He has also said the bank has been preparing additional policy steps
to guard against possible deflation, and that the longer inflation
remained low, the higher was the probability of deflationary risks
emerging.
The relentless weakening trend may focus minds, especially
after the head of Germany's powerful central bank came out to
discuss some of the bolder options in more detail, for example
pumping more money into the economy via a bond-buying programme.
"There's still a case for easing, but we don't think there's going
to be enough agreement within the Governing Council members to ease
on Thursday," said Guillaume Menuet, an economist at Citigroup in
London.
One factor that may temper the ECB's response is a sense among
economists that inflation has hit bottom and will rise in the coming
months. Commerzbank's Christoph Weil said he expected consumer
prices to be back at 0.9 percent in April, noting the late Easter
and also stabilizing food and energy prices.
(Writing by Robin Emmott; editing by Catherine Evans)
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