Tuesday, July 1, 2014

Euro-Zone Inflation Rate Stays at Lowest Level in Over Four Years

Figures Underline the Scale of the Challenge Facing the ECB
The Wall Street Journal

By PAUL HANNON And TODD BUELL CONNECT
Updated June 30, 2014 6:38 a.m. ET
The euro zone's annual rate of inflation was unchanged in June, stuck at its lowest level in more than four years, while bank lending to households and businesses declined in May.

The ECB took steps on June 5 designed to stave off the threat of dangerously low inflation in Europe, including cutting a key interest rate below zero for the first time to get banks to lend more to credit-starved customers.

Figures released Monday underlined the scale of the challenge. The European Union's statistics agency said that the rate of inflation across the 18 members of the euro zone was unchanged at 0.5% in June.

That marked the ninth straight month in which the inflation rate was below 1%. The ECB targets an inflation rate of just below 2%.
The rate of inflation was 0.5% in March, and rose briefly to 0.7% in April, largely as a result of higher prices for package holidays over Easter. Before March, the inflation was last as low in November 2009, when the economy was beginning to emerge from the deep contraction that followed the global financial crisis.

Very low inflation makes it more difficult for governments, households and businesses to reduce their debts, a particular problem in highly indebted southern Europe, but not limited to that part of the euro zone.

It also makes it more difficult for southern Europe to regain lost competitiveness relative to Germany. When consumers and businesses start to expect that prices will decline, they could postpone major purchases and thus weaken economic growth.

The ECB released figures that showed bank lending to the private sector fell for the 25th straight month, as the euro zone struggles to recover from its interlinked debt and banking crises.

When adjusted for "sales and securitization," household loans rose by €3 billion in May, while loans to firms declined by €4 billion.

Among the measures announced June 5, the ECB said it would offer €400 billion in long-term loans to banks later this year. As part of that program it will allow banks to increase borrowing if they lend more to the private sector.

"The fall in bank lending to businesses has clearly reflected a continuing combination of limited supply and muted demand," said Howard Archer of IHS Global Insight. "Banks likely believe the economic situation and outlook in a number of euro-zone countries still provide an uncertain and risky backdrop."

The ECB said it expects the inflation rate to remain around May lows for some months to come, and only gradually rise toward its target in the coming years. Speaking when the central bank's new measures were announced, ECB President Mario Draghi said it may take between nine and 12 months for their full impact to be felt.

The central bank's governing council next meets Thursday and economists don't expect any additional policy moves.

"Barring any dramatic divergence from the ECB's baseline outlook, we think the governing council is on the sidelines for the next few months until such time as it is possible to form some kind of tentative judgments on the effects of the most recent package of measures," said James Ashley, an economist at RBC.

The decline in lending during May adds to indications that the euro zone's economic recovery remained modest in the second quarter. Also Monday, figures released by Germany's statistics office showed retail sales in the currency area's largest economy fell by 0.6% in May from April.


Write to Paul Hannon at paul.hannon@wsj.com and Todd Buell at todd.buell@wsj.com

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