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Euro zone inflation at a four-year low, raising pressure on ECB

BRUSSELS/FRANKFURT (Reuters) - Euro zone inflation fell deeper into negative territory last month, raising pressure on the European Central Bank to add stimulus, as an ongoing recession will keep price growth below its target for years to come.

FILE PHOTO: People wearing protective masks walk in the Montorgueil street as France reinforces mask-wearing as part of efforts to curb a resurgence of the coronavirus disease (COVID-19) across the country, in Paris, France, August 22, 2020. REUTERS/Christian Hartmann/File Photo

Annual inflation in the 19 countries sharing the euro fell to minus 0.3% in September, its lowest in more than four years, from minus 0.2% a month earlier. That fell short of expectations for an unchanged reading, data from Eurostat showed on Friday.

More worryingly for ECB policymakers, underlying inflation, which excludes volatile food and energy costs, fell to 0.4% from 0.6%, far from the ECB’s target of almost 2%. Services inflation slowed further and the cost of imported industrial goods fell.

Although the ECB has unleashed unprecedented stimulus this year to combat a pandemic-induced economic shock, rising unemployment, surging savings, widespread restrictions on travel and plummeting business investment have proved an exceptional drag on prices.

A second wave of the coronavirus is likely to add to the gloom, which torpedoes confidence and weighs on prices further, economists say.

While the ECB held fire last month, it kept the door wide open to more stimulus. Board member Fabio Panetta made a clear case for preemptive action, arguing that the cost of doing too much is smaller than the cost of inaction.

His argument is further supported by a tumble in an even narrower core inflation reading, which also excludes alcohol and tobacco prices, to 0.2% from 0.4%.

Still, no ECB move is likely in October. Policymakers have long said that more data, particularly on 2021 fiscal policies, will be needed before they can take a fresh decision.

They have also prepared markets for bad inflation readings, arguing that price growth could stay negative for the rest of the year before a steady acceleration next year.

But more stimulus is increasingly likely in December. The ECB is expected then to extend and expand its 1.35 trillion-euro Pandemic Emergency Purchase Programme, used to soak up government and corporate debt to keep borrowing costs down.

The ECB could also improve the terms of its super cheap loans to commercial banks so they will keep lending to the real economy.

For details of Eurostat data click on:

here

Reporting by Philip Blenkinsop and Balazs Koranyi, editing by Larry King

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