Weak eurozone inflation sets stage for ECB stimulus

[BRUSSELS] Eurozone inflation came in lower than expected in November, official data showed on Wednesday, giving further encouragement to the European Central Bank to pump up its stimulus to boost the economy.

ECB president Mario Draghi is widely expected to ramp up the central bank's contested bond-buying programme on Thursday given low inflation levels across the 19 countries that share the euro.

The EU's Eurostat statistics agency said inflation was unchanged in November at a weak 0.1 per cent, lower than analysts' forecast of 0.2 per cent inflation for the period.

This is well below the ECB's official target of near or just below 2.0 per cent.

"November's weaker-than-expected euro-zone consumer prices figures give a final green light for the ECB to both increase the pace of its asset purchases and cut its deposit rate at tomorrow's policy meeting," said Jonathan Loynes, Chief European Economist at capital Economics.

In March, the ECB launched a more than one-trillion-euro stimulus plan running through to September next year in order to snap a long period of low or negative inflation in the eurozone.

But the effects of that policy have now shown its limits, pushing the ECB toward further easing of monetary policy, many analysts believe.

The euro immediately fell to a low for the day after the diappointing data, dropping 0.42 per cent against the dollar to $1.0588 in London trade.

Inflation in November was dragged down by energy prices, led by oil, but this fall slowed to 7.3 per cent annually instead of 8.5 per cent the previous month, the data showed.

Draghi on November 20 said the bank will "do what we must" to lift inflation as quickly as possible.

Central bankers of the 19-member eurozone are keen to fight falling prices because they can be poisonous for the economy, creating a vicious circle of falling demand and fewer jobs.

While falling prices might appear to be good for consumers, deflation can become entrenched if consumers delay purchases in the hope of lower prices later, which in turn prompts companies to hold off investment.

Most worryingly for the ECB will be the fall in core inflation, which excludes oil and food. This went to 0.9 per cent from 1.1 per cent a month earlier.

"The ECB will be particularly disappointed to see the relapse in core inflation in November. Consequently, there can be little doubt that the ECB will press ahead with further stimulus at its December meeting on Thursday," said Howard Archer of HS Global Insight.

AFP