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Eurozone lurches into deflation after oil price crashes QE 'inevitable' as struggling eurozone plunges into deflation
(about 14 hours later)
Eurozone inflation has turned negative for the first time since 2009 as Brent crude oil briefly slipped below the $50-a-barrel mark. The eurozone slipped into deflation in December, stoking market expectations that the European Central Bank will push the button on its own programme of quantitative easing later this month.
Prices across the single currency bloc were 0.2 per cent lower in December than a year earlier, the first incidence of outright deflation across the eurozone since October 2009. Eurostat’s flash estimate of annual consumer price inflation in the eurozone today was minus 0.2 per cent. This was weaker than the markets had expected and prompted analysts to argue that sovereign bond purchases were now overwhelmingly likely to be announced at the ECB’s next meeting on 22 January.
The fall, largely driven by a tumbling oil price, was worse than the 0.1 per cent decline expected by economists, and piles the pressure on European Central Bank boss Mario Draghi to launch a full-scale money-printing programme this month. “The news will surely set the seal on the ECB’s much anticipated introduction of quantitative easing and could serve to silence, or at least mollify, likely Governing Council dissenters,” said Nick Beecroft of Saxo Capital Markets.
Inflation has been below the ECB’s target of “close to 2 per cent” for two years despite numerous efforts to kick-start the economy including a historic move into negative interest rates. The ECB president Mario Draghi “must act if he wants to avoid deepening deflation fears in the short term”, said Dawn Kendall, senior bond strategist at Investec. The ECB’s mandate is to keep inflation at just below 2 per cent and Mr Draghi dropped heavy hints in an interview last week that the bank was gearing up for bond purchases.
Even deeper inflation is expected in the months ahead, spurring Draghi into action. The inflation news pushed down the euro further against the dollar, with the single currency slipping to a new nine-year low of $1.1816. The eurozone price index was depressed by collapsing global energy prices, which fell by 6.3 per cent year on year, according to Eurostat. Core inflation, excluding energy food, alcohol and tobacco, rose slightly to 0.8 per cent.
ING’s Teunis Brosens said: “The question no longer seems ‘if’ the ECB is going to announce quantitative easing on January 22, but ‘how’ it will be tailored.” Analysts predicted that further falls in the global oil price were likely to push inflation in the eurozone further into negative territory in the coming months. “Inflation could be expected to remain negative until very late in 2015,” Janet Henry of HSBC said.
Brent crude dipped briefly to $49.66, having plunged by more than half since its $115-a-barrel peak last year. The price of a barrel of Brent crude was trading at $51, less than half its value in June.
A global supply glut with booming shale production, as well as a reluctance from cartel Opec to cut production, has combined with growth worries over the eurozone and China to pummel prices. In further disappointing news, unemployment in the eurozone edged up by 34,000 to 18.39 million in November, the fourth increase since July. “The economy is weak and inflation negative. That should be enough [for QE],” said Peter Vanden Houte of ING.
Even more pain could be in prospect, City experts say. Spreadex financial analyst Connor Campbell said: “Brent crude could find itself desperately using $49 per barrel as a support level. However, in this current oil-adverse climate, even this mark may be optimistic.” The Dutch press reported earlier this week that the ECB is considering three parameters for a bond purchase programme: one would be a scheme similar to those of the US Federal Reserve and the Bank of England; another would be restricted to high-quality sovereign bonds; the third would mean national central banks were left with the risk of losses on purchases.
Markets also fretted over Greece today, pushing the nation’s benchmark borrowing costs for 10 years above the 10 per cent mark for the first time since September 2013. Financial markets also priced in a greater risk of Greece exiting the eurozone, with 10-year yields on Athens’ debt rising above 10 per cent.
Investors fear victory for the far-left Syriza party may lead to a stand-off between Berlin and Athens over austerity measures agreed in bailout deals worth a combined €240 billion (£188 billion). Several eurozone member states are already in deflation; inflation in Germany fell to just 0.1 per cent in December according to official figures released in Berlin this week.
Falling prices: Why are they feared?
If prices are falling and shoppers expect them to keep going down, there is a risk people will delay purchases in the expectation of saving money in the future. This reluctance to spend hurts the wider economy as goods stay on the shelves.
If shops respond by cutting prices further, a deflationary downward spiral can set in. That is why policymakers want to nip deflationary expectations in the bud by keeping prices on the up. Deflation is also perilous for economies where households tend to have significant debts because when prices fall the real (inflation-adjusted) value of the debts rises, discouraging spending and pushing prices down even further.