The European Central Bank will almost certainly act this week to breathe life into the eurozone's struggling economy after a shock fall in inflation, economists said.
An unexpected fall in annual inflation to 0.5% in May from 0.7% in April appeared to seal the case for additional stimulus when the ECB announces its June policy decision on Thursday.
It remains well below the ECB's target of just under 2%, and surprised economists polled by Reuters who had forecast no change.
James Ashley, chief European economist at RBC Capital Markets, described the data as "abysmal", adding: "It almost goes without saying that the ECB will be forced to act on Thursday.
The fact that we have yet more downside news today merely serves to validate the seemingly universal expectations for action this week."
Martin van Vliet, an economist at ING, said action from the ECB now appeared to be "a stone cold certainty".
The options include a cut in the eurozone's main interest rate from a current historic low of 0.25% to 0.15% or lower, as well as a cut in the rate of interest paid on bank deposits, taking it from zero into negative territory.
The ECB could also announce plans to buy packages of business loans. Mario Draghi, the bank's president, has so far resisted calls to tackle low inflation, but dropped a strong hint last month that he was about to relent, declaring that the governing council was "comfortable" with the idea of action in June.
Christine Lagarde, the head of the International Monetary Fund, has been among those to raise concerns that "lowflation" will persist against the backdrop of a sluggish recovery in the 18-nation eurozone, urging the ECB to act.
The fear is that weak price pressures could ultimately trigger a dangerous deflationary spiral, where consumers and businesses put off spending amid expectations that prices will fall further still. May's fall in inflation dragged the annual rate back down to March's four-and-a-half year low.
Eurostat, the region's statistics office, said food, alcohol and tobacco prices rose by just 0.1% in May compared with a year earlier, while energy prices were flat, as were non-energy industrial goods prices.
Core inflation, which strips out energy, food, alcohol and tobacco, fell to 0.7% from 1% in April.
Economists said the fall in that rate partly reflected a normalisation following April's Easter-related rise, but also indicated broader weakness in underlying price pressures.
A sustained recovery has yet to take hold in the eurozone, with growth slowing to 0.2% in the first quarter, down from 0.4% in the previous quarter.
There was some slightly better news from the labour market on Tuesday, as the unemployment rate fell unexpectedly to 11.7% in April, from 11.8% in March. The number of people out of work fell by 76,000 to 18.75 million.
But the headline figure hid big disparities between the 18 member states. The lowest jobless rates were recorded in Austria at 4.9% and Germany at 5.2%.
Greece had the highest rate, at 26.5% in February, followed by Spain at 25.1%. Youth unemployment also fell in the eurozone, by 202,000 to 3.38 million people. The rate fell to 23.5% from 23.9% in March. But more than half of young people in Greece and Spain do not have a job.
theguardian.com
An unexpected fall in annual inflation to 0.5% in May from 0.7% in April appeared to seal the case for additional stimulus when the ECB announces its June policy decision on Thursday.
It remains well below the ECB's target of just under 2%, and surprised economists polled by Reuters who had forecast no change.
James Ashley, chief European economist at RBC Capital Markets, described the data as "abysmal", adding: "It almost goes without saying that the ECB will be forced to act on Thursday.
The fact that we have yet more downside news today merely serves to validate the seemingly universal expectations for action this week."
Martin van Vliet, an economist at ING, said action from the ECB now appeared to be "a stone cold certainty".
The options include a cut in the eurozone's main interest rate from a current historic low of 0.25% to 0.15% or lower, as well as a cut in the rate of interest paid on bank deposits, taking it from zero into negative territory.
The ECB could also announce plans to buy packages of business loans. Mario Draghi, the bank's president, has so far resisted calls to tackle low inflation, but dropped a strong hint last month that he was about to relent, declaring that the governing council was "comfortable" with the idea of action in June.
Christine Lagarde, the head of the International Monetary Fund, has been among those to raise concerns that "lowflation" will persist against the backdrop of a sluggish recovery in the 18-nation eurozone, urging the ECB to act.
The fear is that weak price pressures could ultimately trigger a dangerous deflationary spiral, where consumers and businesses put off spending amid expectations that prices will fall further still. May's fall in inflation dragged the annual rate back down to March's four-and-a-half year low.
Eurostat, the region's statistics office, said food, alcohol and tobacco prices rose by just 0.1% in May compared with a year earlier, while energy prices were flat, as were non-energy industrial goods prices.
Core inflation, which strips out energy, food, alcohol and tobacco, fell to 0.7% from 1% in April.
Economists said the fall in that rate partly reflected a normalisation following April's Easter-related rise, but also indicated broader weakness in underlying price pressures.
A sustained recovery has yet to take hold in the eurozone, with growth slowing to 0.2% in the first quarter, down from 0.4% in the previous quarter.
There was some slightly better news from the labour market on Tuesday, as the unemployment rate fell unexpectedly to 11.7% in April, from 11.8% in March. The number of people out of work fell by 76,000 to 18.75 million.
But the headline figure hid big disparities between the 18 member states. The lowest jobless rates were recorded in Austria at 4.9% and Germany at 5.2%.
Greece had the highest rate, at 26.5% in February, followed by Spain at 25.1%. Youth unemployment also fell in the eurozone, by 202,000 to 3.38 million people. The rate fell to 23.5% from 23.9% in March. But more than half of young people in Greece and Spain do not have a job.
theguardian.com
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