December 2, 2015 / 10:10 AM / 4 years ago

Euro zone core inflation fall bolsters ECB case for easing

BRUSSELS/FRANKFURT (Reuters) - Euro zone core inflation unexpectedly slowed in November, offering yet another argument for the European Central Bank to ease policy on Thursday as price growth looks set to stay below its target for years to come.

Inflated euro sign is seen outside the new headquarters of the European Central Bank (ECB) in Frankfurt, January 22, 2015. REUTERS/Kai Pfaffenbach

Headline inflation across the 19-member euro area held steady at an annualised 0.1 percent in November, below expectations for 0.2 percent and well short of the bank’s target of a rate just below 2 percent.

Core inflation, which has come under closer scrutiny because it strips out the impact of the sharp oil fall in oil prices, meanwhile eased to 0.9 percent from an upwardly revised 1.0 percent, missing analyst expectations for 1.0 percent, data from Eurostat showed.

“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,” Capital Economics economist Jonathan Loynes said.

“The ECB is likely to remain nervous that a further prolonged period of below-target inflation will lead to a bigger drop in inflation expectations,” Loynes added.

The ECB is widely expected to ease policy on Thursday with markets only guessing what measures it would take from a wide range of options on the table.

The euro EUR= weakened a third of a percent against the dollar on the fresh data, indicating renewed bets on easing.

The weaker core figure provides important ammunition for proponents of easing after the ECB’s top hawks, including Bundesbank chief Jens Weidmann, argued the central bank should hold fire as headline data is distorted by oil prices while the underlying trend is healthier.

“This time, it was not energy prices that kept inflation low but service prices,” Nordea analysts said. “As wages are the most important driver for service prices and energy costs play a smaller role, these numbers will most likely strengthen worries in the ECB about too low inflation in the euro area.”

Analysts expect the ECB to cut its deposit rate to -0.3 percent from -0.2 percent, extend its asset purchase programme and lift monthly purchases of mainly government bonds to 75 billion euros a month from 60 billion euros.

But it could also opt for more unusual measures, like imposing a punitive deposit rate on banks parking too much cash with the ECB or expanding the asset purchases into new asset classes like corporate bonds and equities.

The main factor that capped price increases was rising was energy costs, which were 7.3 percent lower this month than a year ago. Unprocessed food, which is also excluded from the core reading, was 2.6 percent more expensive.

Additional reporting by Francesco Canepa; Editing by Toby Chopra

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