AF:Euro Area Inflation Unexpectedly Drops To 0.7%, Euro Drops
Euro area inflation surprisingly retreated to 0.7 percent in February, adding to odds the ECB would intervene next month.
The final reading for February came in at 0.7 percent, compared to both initial and predicted readings of 0.8 percent.
On the month, the rate slipped rose to 0.3 percent from the prior 1.1 percent drop. Annual core CPI lingered at 1.0 percent.
As of 10:06 GMT, the euro slipped versus the U.S. dollar to trade around 1.3893 after touching a peak of 1.3914.
The ECB now sees inflation hovering around 1.7 percent in the fourth quarter of 2016, assuming the decline in oil prices and unchanged exchange rate. Inflation will hover around 1.0% in 2014, 1.3% in 2015 and 1.5% in 2016.
Draghi supports expectations of low inflation to remain for a while, yet inflation will gradually creep towards the ECB target of 2 percent on the medium term.
The ECB sees inflation around the current levels in coming months, noting that upside and downside inflation risks remain limited.
Meanwhile, the focus would remain on further clues about the bank’s coming action after the dovish tone seen by Draghi last week.
While ECB President Mario Draghi refrained from introducing new monetary tools to combat the low inflation this month, he said the ECB has been preparing for new monetary tools to combat deflation.
As long as inflation remains low the higher the possibility the euro area would reel from deflationary pressures, Draghi revealed.
"That is why the ECB has been preparing additional non-standard monetary policy measures to guard against such a contingency and why it stands ready to take further decisive action if needed," Draghi said.
But policymakers may face some barriers as Bundesbank chief Jens Weidmann said last week the ECB would not be able to use unconventional methods without getting legal approval.
Among the tools that could be used by the ECB to stave off deflation is buying packages of bank loans and companies or suspending operations to absorb the money spent on buying sovereign bonds under the ECB’s Securities Markets Programme.
