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ECB Under Pressure to Act

H.S. Borji
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ECB Under Pressure to Act

Eurozone inflation eased to its lowest level in more than four years in March, creating fresh headaches for the European Central Bank ahead of its Thursday rate decision.

Annual consumer inflation in the Eurozone fell to 0.5 percent in March, down from an annualized rate of 0.7 percent the previous month, the European Commission reported Monday in Luxembourg. Economists expected consumer inflation to ease to 0.6 percent.

Stubbornly low inflation prompted the ECB to slash interest rates to new record lows in November. With inflation now at half of the ECB’s forecast for 2014, central bank policymakers are under more pressure to respond.

The ECB, whose inflation target is just under 2 percent, left interest rates unchanged at 0.25 percent last month, a sign policymakers were relatively confident the inflation outlook would not deteriorate.

ECB President Mario Draghi has vowed to do whatever it takes to ensure deflation would not threaten Eurozone recovery. Ahead of Thursday’s rate decision, it is uncertain whether the ECB would resort to more drastic measures this month, or await further evidence. According to several market voices, the ECB has grown more tolerant toward inflation recently. However, policymakers are more likely to soften their resistance to more accommodative measures the longer inflation remains subdued.

Faced with six consecutive months of below 1 percent inflation, the ECB may be forced to slash interest rates to zero or consider easing measures such as a negative deposit rate or quantitative easing. ECB Governing Council member Jens Weidmann confirmed last week the central bank was considering implementing quantitative easing to stimulate the Eurozone economy.

The markets will closely monitor developments Thursday to determine whether the ECB’s tolerance for low inflation has changed. While market participants are speculating the ECB will soon loosen monetary policy, opinions about the approach the central bank will take remains mixed.

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