Deflation Hits Eurozone

alex.foti — Tue, 30 Jun 2009 15:20:19 +0000

Eurozone inflation turns negative

By Ralph Atkins in Frankfurt, June 30 2009 11:03

Eurozone annual inflation has turned negative for the first time, complicating the job of the European Central Bank as draws a line under emergency measures to tackle continental Europe’s recession.

Consumer prices in the 16-country eurozone were 0.1 per cent lower in June than the same month a year before, according to Eurostat, the European Union’s statistical office.

It was the first time eurozone annual inflation had fallen below zero since comparable records began in 1991. Inflationary pressures in continental Europe are now lower than at anytime since at least the early 1950s, according to calculations by some economists.

The fall in prices reflected sharply lower energy costs but also the effects of the worst post-war economic downturn. The US had already reported year-on-year falls in consumer prices.

News that inflation had turned negative – and was massively undershooting the ECB’s target of an annual rate “below but close” to 2 per cent – came as the ECB prepares for Thursday’s interest rate setting meeting in Luxembourg.

Since last October, the ECB has slashed its main policy rate by 325 basis points to 1 per cent, and pledged to meet in full banks’ demands for liquidity – which resulted in it last week pumping €442bn in one-year loans in the banking system.

But the ECB’s governing council is not expected to cut official borrowing costs further at this week’s meeting and analysts expect the main policy rate to remain at 1 per cent for many months – possibly well into next year or even beyond.

The ECB believes the impact of its measures have still to feed through into the economy. But it faces a difficult balancing act. Even though the inflation outlook justified further action, the central bank feared “that more aggressive easing now could risk financial stability and or a too sharp acceleration of inflation over the longer-term,” said Nick Kounis, European Economist at Fortis Bank.

Jean-Claude Trichet, ECB president, is likely to stress on Thursday that negative inflation will be only a temporary with a return to positive annual rates expected later this year. But ECB forecasts show inflation remaining well below 2 per cent in 2010 and the worry for ECB policymakers is that months of below-zero inflation rates will stoke fears of full-blown deflation – generalised and persistent falls in prices that wreak significant economic damage.

Meanwhile, credit figures released by the ECB just ahead of the inflation news highlighted how the liquidity it has pumped into the banking system have not yet stopped credit flows to the economy from being thrown into reverse. Businesses repaid a net €5bn in loans in May, slowing the annual rate of growth in such loans to just 4.4 per cent. Even more dramatically, the annual rate of growth of borrowing by households turned negative, with loans down 0.2 per cent on the year.

The ECB has been stepping up its appeals recently for banks to pass on the extra liquidity they have been lent, but it could be some months before any extra lending to businesses and households shows up in official data.

Euroland in Deflation, but Trichet Couldn’t Care Less

alex.foti — Fri, 29 May 2009 13:09:16 +0000

EUROZONE INFLATION FALLS TO ZERO

By Ralph Atkins in Frankfurt, May 29, 2009

Eurozone inflation has fallen to zero, the lowest since comparable records began in 1991, and could fall even lower as a result of the region’s severe recession as well as cheaper oil prices.

The annual inflation rate in the 16-country region fell from 0.6 per cent in April to 0.0 per cent this month, according to Eurostat, the European Union’s statistical office.

Economists said inflation would turn negative in June, complicating further the task of the European Central Bank as it seeks to combat the worst economic downturn for half a century in continental Europe.

Among the eurozone’s biggest countries, Germany and Spain have already reported negative national inflation rates.

The worry for the ECB will be that below-zero inflation rates will stoke fears of full-blown deflation – generalised and persistent falls in prices that wreak significant economic damage.

Jean-Claude Trichet, ECB president, warned earlier this month that eurozone inflation was likely to be negative “for some months”. He argued recent falls reflected the statistical effects of last year’s oil price rises and forecast a pick up in inflation later this year. The ECB also argues that long-run inflation expectations – which it watches closely – remain in line with its goal of an annual inflation rate “below but close” to 2 per cent.

However, the latest inflation data were weaker than expected and economists believe the recession will reduce inflationary forces further in coming months.

“The severe contraction in activity has created a huge margin of space capacity in the economy, which will exert strong downward pressure on core prices,” said Martin van Viet at ING bank. “There remains a real risk that the eurozone will see more than a whiff of deflation.”

Forward-looking confidence indicators have suggested the eurozone is contracting at a much slower pace than at the start of the year. But latest ECB credit data underscored the continuing weakness of eurozone economic activity. They showed annual growth in eurozone mortgage lending and consumer credit turned negative in April for the first time since the launch of the euro in 1999.

The ECB has cut its main interest rate by 325 basis points since last October to 1 per cent, the lowest ever, and is not expected to announce any change after its meeting next week.

But it has followed the US Federal Reserve and Bank of England in announcing an emergency asset purchase programme to help revive financial markets. The ECB will next week announce details of its plans to buy €60bn in “covered bonds, which are issued by banks and backed by public sector loans and mortgages.

One likely solution is that the package will be split according to eurozone countries’ capital shares in the ECB, which would result in Germany accounting for about 25 per cent of the €60bn programme.

GERMAN PRICE FALLS ADD TO ECB PRESSURE

By Ralph Atkins in Frankfurt, May 27, 2009

German inflation has turned negative for the first time in more than 20 years, fuelling fears of a fall in prices across the eurozone that will add to pressures facing the European Central Bank as it grapples with Europe’s severe recession.

Consumer prices in Germany fell 0.1 per cent this month from a year ago on a European harmonised basis, the country’s statistical office said on Wednesday. The unexpected drop was the first negative annual inflation rate since comparable records began in 1996 and since March 1987 on the previous basis.

The German data mean eurozone figures due on Friday are expected to show annual inflation in the 16-country region at about zero in May with a dip into negative territory likely in June, economists said. Spain, Ireland and Portugal – three of the eurozone countries worst hit by the global downturn – have already reported negative annual inflation rates.

Inflation has tumbled on the back of steep falls in oil and commodity prices but also on weaker economic activity. “Energy is behind the wild swings, but core inflation is easing quite a lot and that is because we have the deepest recession since the 1930s,” said Dirk Schumacher at Goldman Sachs in Frankfurt.

The worry for the ECB, which has ensuring “price stability” as its main task, is that falling headline inflation rates fuel fears of a damaging deflation phase – in which generalised price falls wreak significant economic damage.

The ECB has warned that headline eurozone inflation rates are likely to turn negative for some months and thus undershoot by a large margin its definition of price stability – an annual inflation rate “below but close” to 2 per cent.

It argues short-term inflation trends are irrelevant for monetary policy and sees inflation rising later this year. More importantly, it sees long-term expectations for inflation still in line with its goal. Core eurozone inflation, which excludes volatile energy and unprocessed food costs, has remained positive – except in Ireland.

However, Julian Callow, European economist at Barclays Capital, warned negative headline inflation would create “an important communication challenge” for the ECB. The risk was that a bout of “benign deflation” became malign, he said. The speed at which inflation had eased in Spain and Ireland, suggested that prices were proving more responsive to the crisis than might have been expected, Mr Callow argued.

Since last October, the ECB has slashed its main policy rate by 325 basis points to 1 per cent, the lowest ever. Jean-Claude Trichet, ECB president, has been careful not to rule out further cuts in interest rates or additional emergency measures. However, next week’s meeting is expected to see official interest rates left unchanged.

Great Recession » eurozone

Deflation Hits Eurozone

Euroland in Deflation, but Trichet Couldn’t Care Less

EUROZONE INFLATION FALLS TO ZERO

Economists said inflation would turn negative in June, complicating further the task of the European Central Bank as it seeks to combat the worst economic downturn for half a century in continental Europe.

GERMAN PRICE FALLS ADD TO ECB PRESSURE