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Categorized | Economy

Euro drops as inflation hits new low


Posted on September 30, 2014

The Euro logo is pictured outside European Central Bank ahead of the the meeting of the Governing Council in Frankfurt am Main, central Germany, on August 1, 2013. Mario Draghi, President of the European Central Bank, ECB repeated a pledge that eurozone interest rates would remain low or could even fall further amid risks for the euro area. AFP PHOTO / DPA / BORIS ROESSLER GERMANY OUT (Photo credit should read BORIS ROESSLER/AFP/Getty Images)©AFP

The euro slid to a fresh two-year low against the dollar on Tuesday, after data showing a continued decline in eurozone inflation fuelled speculation that the European Central Bank would be forced to step up its stimulus policies.

The euro – which has fallen some 9 per cent against the dollar since the start of May – dipped below $1.26 on Tuesday for the first time since September 2012.

    “The market is starting to price in quantitative easing,” said Peter Kinsella, currency strategist at Commerzbank, who added that even if it was too early to expect action yet, the exchange rate had effectively become the ECB’s “key policy tool”.

    The euro’s sharp drop came as consumer inflation in the eurozone dipped to 0.3 per cent this month from 0.4 in August, hitting a five-year low. Price pressures are now at less than a fifth of the ECB’s target of below but close to 2 per cent.

    Core inflation, which excludes more volatile items such as food and energy prices, fell unexpectedly to 0.7 per cent, from 0.9 per cent last month, according to a flash estimate from Eurostat, the European Commission’s statistics bureau.

    Euro against the dollar

    Analysts believe the surprise drop in the core measure is particularly concerning for the ECB, as it prepares to flesh out its latest plan to rid the region of the threat of economic stagnation.

    “[The fall in core inflation] might well prove to be a blip, and could be revised higher with the final estimates,” said Frederik Ducrozet, economist at Crédit Agricole. “But at the very least this will keep [pressure on] the governing council to do more.”

    Monetary policy makers travel to the Italian city of Naples later this week, where they will on Thursday unveil details of a plan to buy asset-backed securities worth hundreds of billions of euros. Central bankers hope the plan, announced last month, will revive the region’s ailing recovery.

    But investors are increasingly betting that the ECB will now be forced to contemplate more radical measures – including outright purchases of sovereign bonds – before the end of the year.

    Chart

    Mr Ducrozet said: “A further adjustment to existing programmes is a possibility on Thursday, and either way the door should remain wide open to proper sovereign quantitative easing. The latter would become more likely if the ECB qualifies the drop in core inflation as a ‘worsening of the outlook for price stability’.”

    Separate data also out on Tuesday showed that unemployment in the eurozone remained at 11.5 per cent in August, the same level as in July. Eurostat estimated 18.3m of those looking for work in the currency area were without it.

    Italy said youth unemployment had risen to a fresh high, with 44.2 per cent of people in the labour market aged 15 to 24 without jobs. For older workers conditions have improved slightly. Istat, Italy’s statistics authority, reported unemployment has fallen to 12.3 per cent, from 12.6 per cent in July.

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