Euro zone inflation hits record low, ECB cut seen

Euro zone inflation plunged to an all-time low in March, data showed, boosting the case for a deep interest rate cut by the European Central Bank on Thursday.
The European Union's statistics office, Eurostat, said on Tuesday that inflation in the 16 countries using the euro fell to 0.6 percent year-on-year from February's 1.2 percent, against market expectations of a decline to 0.8 percent.
The ECB wants inflation to be below, but close to, 2 percent. Several ECB officials have said the bank would take action to prevent the gauge from falling too far below target, even though they saw no risk of deflation.
"With euro zone consumer price inflation falling substantially further below the ECB's target level … and a period of deflation looking ever more likely, there is an ever more compelling case for the ECB to reduce interest rates further," said Howard Archer, economist at IHS Global Insight.
Economists expect the ECB to cut interest rates on Thursday by 50 basis points to 1.00 percent.
"In addition, the ECB is under increasing pressure to come up with additional measures to try and boost economic activity, and it may well also announce on Thursday that it will extend the period that it will provide unlimited liquidity to banks from six months to one year," Archer said.
The ECB has said that for deflation to exist there must not only be a protracted period of negative inflation, but also negative inflation expectations, which would make consumers hold back purchases.
Economists noted that the European Commission's consumer survey results for March, published on Monday, confirmed that inflation expectations among households had hit record lows.
"There is, however, no evidence to suggest that consumers are holding back in the hope of lower prices," said Rainer Guntermann, economist at Commerzbank.
The Commission survey showed euro zone consumers expected savings to fall over the next 12 months, plans for major purchases over the same period were unchanged from last month and the number of people planning major buys had risen.
"Falling inflation is thus a welcome stabiliser for the trend in private consumption, even though the positive effect on purchasing power is being outweighed by mounting concern about job security," Guntermann said.
No detailed breakdown or month-on-month data from Eurostat was available, but economists said the drop reflected falls in food and energy prices and core inflation.
"With food and energy inflation set to continue to slow as last year's sharp rises fall out of the annual calculation, the headline rate should turn negative in the summer," said Ben May, economist at Capital Economics.
The March inflation is the lowest since Eurostat records started in 1996. The next closest rate of consumer price growth was for four months from November 1998 to February 1999.