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ECB unlikely to move on rates this week

Tuesday, January 07 14:56:52

A surprise drop in euro zone inflation will concern European Central Bank policymakers but they will likely do no more on Thursday than warn of their readiness to act in future.

The policymaking Governing Council meets after data showed annual euro zone inflation dipped to 0.8 percent in December from 0.9 in November. The ECB targets inflation of just below 2 percent.

Core inflation, which strips out volatile costs like food and energy, hit a record low of 0.7 percent.

The readout will heighten concerns at the ECB about entrenched price weakness taking hold, though strong company activity towards the of last year will give them some comfort.

"Obviously they are worried, but it's not significantly lower than it was a month earlier," Anders Svendsen at Nordea said. "I don't think it's enough to prompt a new rate cut but I do think it's enough to keep them dovish and ready to act."

The ECB cut its main interest rate to a record low 0.25 percent in November after inflation slid to 0.7 percent. No change is expected this week, though ECB President Mario Draghi has stressed the bank still has room to act.

"We are not seeing any deflation at present," he told German magazine Der Spiegel late last month. "But we must take care that we don't have inflation stuck permanently below one percent and thereby slip into the danger zone."

The ECB's readiness to contemplate using new policy tools means it is diverging from the U.S. Federal Reserve, which is poised to wind down its stimulus this year.

Peter Praet, the ECB's chief economist, raised the possibility in November of the ECB embarking on asset buys - or quantitative easing (QE) - just as the Fed prepares to scale down its QE programme.

It would probably require a period of inflation at zero and lower - and the threat of a Japan-style lost decade that would pose - for a majority on the ECB council to support printing money.

The ECB has also vowed to keep interest rates "at present or lower levels" for an extended period. Other policy options include a new liquidity operation, which many economists expect the ECB to offer banks in the coming months. (Reuters)