|Euro area low inflation concern lingers ahead of ECB interest rates decision
The European Central Bank is unlikely to cut key interest rates today following better-than-expected economic data in the past few days, but the decision will be a close call, analysts said.
A number of central bank watchers had been betting on a rate cut this month given the worryingly low level of inflation in the 18 countries that share the euro.
Nevertheless, the specter of deflation is being kept at bay could stay the ECB's hand for one more month, analysts said.
The latest data compiled by the EU's statistics agency Eurostat put inflation at 0.8 percent in February, the same level as in January.
While that is below the ECB's target of just under 2 percent, it was fractionally better than the 0.6 percent that many economists had been predicting.
“We think the ECB will continue to underline it has options for further easing, but hold off using them unless the recovery takes a turn for the worse,'' said Tom Rogers of EY Eurozone Forecast.
“The main focus at the meeting will be on the staff's updated economic forecasts, and in particular whether inflation is likely to remain below target in 2016, thus potentially creating room for further monetary policy action in the coming months.’’
“It is a close call this time,'' said Berenberg Bank economist Christian Schulz.
“The ECB itself had considerably raised the odds of additional easing action by highlighting, in its last statement, the new inflation forecasts that it will publish at the March meeting.
“But mostly positive data releases since February have weakened the case for action.
“On balance, the data received since the last meeting do not warrant downward revisions of the inflation forecasts. The euro zone recovery is proving resilient to the emerging market troubles.’’
Many ECB watchers believe the ECB held off cutting rates in February in anticipation of its updated staff economic projections, also scheduled for today.
Economists are concerned that some of the 18 countries that share the euro could find themselves slipping into deflation.
But ECB chief Mario Draghi insisted last week that while euro zone inflation is low, he saw no danger of deflation.
Even though current inflation rates “can clearly not be considered close to 2 percent... we are clearly not in deflation, which is defined as a self-reinforcing fall in prices that is broad-based across items and across countries,'' Draghi said.
Natixis economist Johannes Gareis said: “We do not expect the ECB to cut interest rates going into March.’’
The ECB's 2016 inflation forecast was likely to be considerably higher than the 2015 forecast of 1.3 percent.
“With the medium term inflation rate closer to the ECB's target, this could be enough for the ECB not to touch interest rates,'' Gareis said.