Tags: Eurozone | Inflation | Europe | ECB

Eurozone Inflation Edges Higher, Swift ECB Action Seen Less Likely

Wednesday, 30 Apr 2014 07:43 AM

Inflation across the 18-country eurozone rose in April, official figures showed Wednesday, but not as much as had been anticipated in the markets. Even so, few economists think the European Central Bank is quite ready to back another stimulus to the eurozone economy.

Eurostat, the EU's statistics office, said consumer prices rose by 0.7 percent in April from the year before, up from the previous month's 0.5 percent.

The expectation in the markets was for a slightly bigger rise to 0.8 percent. An increase had been predicted largely because of the timing of Catholic Easter, which often prompts a rise in prices, particularly in the services sector. Last year it fell in March so that increase dropped out of the annual comparison.

Despite the rise, many economists expect inflation to fall again in coming months. However, the ECB thinks deflation, or an outright fall in prices, is unlikely. Deflation can weigh on the recovery as falling prices may prompt consumers to delay purchases and businesses to be reluctant to invest.

Following Eurostat's estimate of inflation, the euro rallied somewhat to $1.3820 from $1.3790, likely because traders think inflation isn't low enough to prompt further stimulus from the ECB just yet. Looser monetary policy tends to weigh on the value of a currency.

"Overall we think this leaves the ECB in limbo given that a number any lower would most likely have triggered immediate action, while a number any higher would have argued strongly in favor of holding out for a more holistic appraisal of the outlook in June," said James Ashley, chief European economist at RBC Capital Markets.

"Instead, what we have is an indeterminate outturn which can be used to support the positions of both hawks and doves alike," Ashley added.

The ECB holds its monthly policy meeting next Thursday but few economists think it's ready to back further measures despite some recent hints that it's ready to do more to shore up the economic recovery and prevent potential deflation. The ECB has a target of keeping inflation just below 2 percent.

If it did act, the ECB could further cut the benchmark refinancing rate from the current 0.25 percent or even launch a program to create new money in the economy, similar to the one pursued by the U.S. Federal Reserve.

Most economists think the ECB will want to see inflation falling further before backing more stimulus and will keep a close eye on the first quarter economic growth figures. In the final quarter of 2013, the eurozone grew by only 0.2 percent from the previous three-month period.

"The eurozone's weak economy and strong currency make inflation likely to drift lower in coming months, which most likely will prod the ECB to cut rates again at mid-year 2014," said Bill Adams, senior international economist for PNC Financial Services Group.

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Inflation across the 18-country eurozone rose in April, official figures showed Wednesday, but not as much as had been anticipated in the markets. Even so, few economists think the European Central Bank is quite ready to back another stimulus to the eurozone...
Eurozone, Inflation, Europe, ECB
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2014-43-30
Wednesday, 30 Apr 2014 07:43 AM
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