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EU inflation within ECB's 'danger zone'

Friday, February 28 12:25:29

Euro zone inflation stabilised in the European Central Bank's "danger zone" in February but did not fall as expected, making it less likely the ECB will loosen monetary policy further at its monthly meeting next week.

European Union statistics office Eurostat estimated today that consumer prices in the 18 countries sharing the euro rose an annual 0.8 percent this month. That was the same rate as in January and December, after readings of 0.9 percent in November and 0.7 percent in October.

Economists polled by Reuters had forecast inflation would slow to 0.7 percent. Fears the bloc may be at risk of deflation as it struggles to recover from its debt crisis have raised expectations the ECB will use interest rates or other policy tools to give the economy further support.

"The higher than expected inflation numbers reduce the chances of an ECB rate cut at next week's meeting, and we maintain the view that ... the central bank will keep rates on hold," said Nick Kounis, head of macro research at ABN AMRO.

ECB President Mario Draghi has warned of the risk of inflation getting stuck in a danger zone below 1 percent, but said again on Thursday that there was clearly no deflation.

"While the ECB does not see deflation as a serious threat in the euro zone, it is worried about inflation staying below 1 percent for a prolonged period, thereby destabilising inflation expectations," IHS Global Insight economist Howard Archer said.

"Consequently, it still looks touch-and-go whether the ECB will take any further stimulative action at its March 6 policy meeting. Much will likely depend on whether the ECB staff's new forecasts show euro zone consumer price inflation still below 2.0 percent in 2016."

The February inflation rate was stable because lower energy costs were offset by more expensive industrial goods and services, the Eurostat data showed.

"The outcome is rather odd as it does not seem to be consistent with the falls in annual inflation we have seen in Germany, Spain, Italy and Belgium," Kounis said.

"The outcome may have been driven by a jump in inflation in France, where the data are not yet released, but this would be difficult to explain. We suspect that euro zone inflation will be revised down in the final estimate."

Figures on Thursday showed annual inflation in Germany, the euro zone's economic powerhouse, easing to its lowest level in 3-1/2 years in February at 1 percent.

But so-called core inflation in the euro zone, which excludes the most volatile components like energy, food, alcohol and tobacco prices, continued to inch higher, Friday's data showed. It rose to 1.0 percent year-on-year in February from 0.8 percent in January and 0.7 percent in December.

Price pressures in the euro zone are low because unemployment remains stuck near record highs. Eurostat said on Friday that 12 percent of the bloc's workforce was unemployed in January, unchanged from a month before. (Reuters)