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Euro-area inflation stays at 0.2% as ECB sees downside risks

European Central Bank.jpg
The European Central Bank's holdings of asset-backed debt fell for the first time since January, even as the bank steps up purchasing efforts to help boost regional lending.

[FRANKFURT] The euro area's inflation rate held steady in August, highlighting the challenge facing European Central Bank policy makers as they seek to revive consumer-price growth.

Consumer prices rose an annual 0.2 per cent, exceeding the median economist forecast for a reading of 0.1 per cent. Core inflation held at 1 per cent, the EU's statistics office in Luxembourg said in a report on Monday.

The ECB has cut interest rates and is buying bonds to battle anemic inflation, which has been below the central bank's goal of just under 2 per cent for two years. With China's economy cooling and oil prices falling, Executive Board member Peter Praet said last week the challenge is become tougher and that policy makers are ready to do more if needed.

The data provide "a modicum of relief for the ECB," said Howard Archer, an economist at IHS Global Insight. "It still seems most probable that the eurozone will avoid renewed deflation and that consumer price inflation will trend gradually up from the final months of 2015."

The euro rose 0.2 per cent to $1.1213 at 11:48 am in Frankfurt. The single currency has climbed 2 per cent in August, set for the best month since April.

To help reverse course and fulfill its mandate, the ECB is in the midst of quantitative easing program that it plans to run until September 2016.

The central bank's Governing Council holds its next policy meeting on Thursday in Frankfurt, President Mario Draghi will give a press conference after the decision, when he will unveil new growth and inflation projections.

The ECB currently forecasts that inflation will average 0.3 per cent this year, improving to 1.5 per cent in 2016.

Consumer prices are "driven by energy and that for the ECB is a double-edged sword," said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen.

"It's good for real income, and we see the recovery in the euro area is driven by private consumption," he said. "The bad part is that it drives inflation further away from the objective."

A Bloomberg gauge that tracks returns from 22 raw materials plunged to the lowest level since 1999 last week on concern a glut in everything from oil to copper will be exacerbated as the Chinese economy grows at the slowest pace in more than two decades.

If those factors threaten its inflation goal, the ECB is ready to expand or extend QE, Mr Praet said on Aug 26.

"Developments in the world economy and in commodity markets have increased the downside risk of achieving the sustainable inflation path toward 2 per cent," he said.


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