ECB urged to act as eurozone inflation falls

By Ralph Atkins in Frankfurt, Bertrand Benoit in Berlin and Daniel Pimlott in London

Published: March 31 2009 11:31 | Last updated: April 1 2009 03:29

Eurozone inflation has fallen significantly closer to negative territory, strengthening the case for further European Central Bank action to boost the economy and head off risks of deflation.

The annual inflation rate in the zone fell more than expected to 0.6 per cent in March (from 1.2 per cent in February), Eurostat, the European Union’s statistical unit, reported on Tuesday.
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This was the lowest figure since comparable records began in the early 1990s, and pointed to substantial undershooting of the ECB’s target of an annual rate “below but close” to 2 per cent.

The Organisation for Economic Co-operation and Development warned the ECB that mounting “disinflationary pressures” in the next two years implied that the “remaining scope for cutting policy [interest] rates should be used quickly, and quantitative easing policies implemented”.

On current trends, eurozone inflation could turn negative by June, economists said. Oil prices probably accounted for much of the March fall, but weakness of the eurozone added to the downward pressure. Spain, Italy and Ireland were “seeing quite a significant deceleration in underlying inflationary pressures”, said Nick Matthews, European economist at Barclays Capital.

With the eurozone recession broadening, Germany reported a pick-up in the rate of increase in unemployment. The number of jobseekers rose by a seasonally adjusted 69,000 in March to 3.4m – the highest since January last year – pushing the jobless rate up to 8.1 per cent from 8 per cent in February.

Further rises are expected in the coming months as companies stop taking advantage of wage subsidies that have prevented mass layoffs.

The Paris-based OECD expects advanced economies to contract by 4.3 per cent in 2009, with little or no growth in 2010. While the downturn will leave no advanced economies unscathed, the OECD believes that it will be less severe in the US and UK, which are less dependent on trade, even though their banking systems have proved more fragile.

The US is expected to suffer a 4 per cent decline in gross domestic product this year, followed by no growth in 2010, but the eurozone is forecast to contract by 4.1 per cent this year and 0.3 per cent next. Within the eurozone, Germany is expected to see the worst recession, with a 5.3 per cent decline in GDP in 2009.

The ECB is expected to cut the main policy interest rate by a further half point to 1 per cent on Thursday. To fight recession it has focused on flooding the banking sector with unlimited, low-interest liquidity. But it is considering further steps, including buying private-sector debt.