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Updated: Tue, 07 Jan 2014 07:06:52 GMT | By Pan Pylas, The Associated Press, thecanadianpress.com

Eurozone inflation drop puts pressure on ECB

LONDON - The pressure on the European Central Bank to ease monetary policy further in coming months ratcheted up Tuesday after figures showed underlying inflation in the eurozone fell to a record low.


Eurozone inflation drop puts pressure on ECB

A man begging on the street as people walk past him in Pamplona, northern Spain on Friday, Jan. 3, 2014. The Labor Ministry says the number of people registered as unemployed in Spain fell by 107,570 in December, the best drop on record for the month and welcome news for an economy struggling to emerge from more than two years of recession. Quarterly unemployment surveys, seen as more accurate by economists, show that Spain's unemployment rate was 26 percent in the third quarter, with 6 million people jobless. The rate is the second highest in the 28-country European Union after Greece. (AP Photo/Alvaro Barrientos)

LONDON - The pressure on the European Central Bank to ease monetary policy further in coming months ratcheted up Tuesday after figures showed underlying inflation in the eurozone fell to a record low.

Eurostat, the EU's statistics office, said inflation across the 17 EU countries that used the euro in December fell to 0.8 per cent, as expected, from 0.9 per cent the month before. The ECB is tasked with setting monetary policy to keep price inflation just below 2 per cent.

Perhaps the most notable aspect of Tuesday's figures was that the core rate, which excludes energy, food, alcohol and tobacco, fell to an all-time low of 0.7 per cent. That may raise concerns that the eurozone may face a period of deflation, a protracted fall in prices that chokes off consumer spending and business investment.

"In our view it is the soft 'core' inflation print that is the main item of news in this report," said James Ashley, senior economist at RBC Capital Markets. "It constitutes the weakest reading on record (back to 1990) and reflects a marked slowdown in services price inflation."

An outright fall in prices remains a possibility, partly because wage increases are muted due to high unemployment. The relatively high value of the euro, meanwhile, has made imports cheaper at the same time as making exports more expensive.

Some countries, notably Greece, are already seeing falling prices, a development that may make its debt servicing even more difficult.

Most economists think the ECB will keep its monetary policy unchanged at its meeting Thursday even though inflation is well below the target of keeping price rises just below 2 per cent.

However, they also think that ECB President Mario Draghi will leave the door open to a further loosening of policy in his ensuing press conference, given the low inflation and growth backdrop.

"The ECB will need to remain alert to the risk of deflation, and following Thursday's Governing Council meeting be prepared to respond to increased speculation over which policy tools it might use to try and address falling prices," said Tom Rogers, senior economic adviser at EY, formerly Ernst & Young.

A number of measures have been mooted to improve economic growth — which was a paltry quarterly rate of 0.1 per cent at last count— and prevent prices from falling:

— Though the ECB has little room to cut its benchmark rate further, some economists predict it could reduce it to 0.10 per cent.

— The ECB could make banks pay to keep deposits at the central bank by cutting the so-called deposit rate to negative, encouraging banks to lend more to businesses and homeowners.

— The ECB could offer another round of long-term, cheap loans to banks, again in the hope of getting them to lend more.

— However, few economists think the ECB will increase the amount of money in the economy, as the U.S. Federal Reserve has done over the past few years. Legal and political constraints are considered to be too great for such a move at the moment.

The eurozone grew to 18 member states at the start of 2014 following Latvia's adoption of the currency.

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