Reuters
Brussels/Frankfurt

Eurozone inflation turned negative again in September as oil prices tumbled, raising pressure on the European Central Bank to beef up its asset purchases to kick start anaemic price growth.
Prices fell by 0.1% on an annual basis, the first time since March that inflation has dipped below zero, missing analysts’ expectations for a zero reading after August’s 0.1% increase.
The negative reading is a headache for the ECB, which is buying €60bn ($67.37bn) of assets a month to boost prices. It has already said it may have to increase or extend the quantitative easing (QE) scheme because inflation may fall short of its target of almost 2% even in 2017.
Long term inflation expectations have dropped to their lowest since February, before the ECB’s asset purchases started, as China’s economic slowdown, the commodity rout and paltry eurozone lending growth reinforce pessimistic predictions.
Even Finnish central bank chief Erkki Liikanen, normally considered an inflation hawk, has warned that eurozone growth is at risk from the slowdown in emerging markets and that inflation could fall short of already modest expectations.
“We believe the ECB will extend its QE programme beyond September 2016, most likely until mid-2018, and that it could reach €2.4tn — more than twice the original €1.1tn commitment,” credit ratings agency Standard & Poor’s said yesterday.
ECB President Mario Draghi, though striking a balanced tone, stressed last week that the ECB was ready to act and had much flexibility regarding the scale, composition and duration of its asset purchases.
Although many of the factors dragging on inflation are outside the bank’s control, such as the plunge in oil prices, some economists argue that any easing of the ECB’s commitment to meeting its target damages the bank’s credibility.
Inflation has run below target for two years now and may not head back towards 2% for another two years.
“Increasing the pace of monthly purchases will have greater impact than extending the duration of the current programme,” Deutsche Bank said in a note to clients. “The hurdle to increase the pace of purchases is likely to be high, leaving a programme extension as the path of least resistance.”
Noises from the 25-member ECB governing council, a distinctly heterogeneous body, have not encouraged hopes it will make anything but cosmetic changes when policymakers next meet on October 22 in Malta.
It may argue for more time to assess the inflation and growth outlook, perhaps until the US Federal Reserve finally commits to its first rate hike in almost a decade and the ECB staff presents new economic forecasts in December.
S&P said it believed beefing up QE was not imminent but a move could be announced in December.
Bundesbank chief Jens Weidmann, the ECB’s top hawk, argued on Tuesday, even after German inflation turned negative, that the ECB needs to look beyond the oil price drop, especially since lower fuel costs boost purchasing power and growth.
Excluding volatile energy prices, inflation is running at 1%, a more respectable figure, while services inflation is at 1.3%.
Weidmann said that just in Germany, the eurozone’s biggest economy, consumers and businesses will save €25bn on lower energy costs, worth about 1% of GDP, keeping the recovery on track even if emerging markets continue to drag.
Repeating his view that asset buys should only be used in an emergency, he also warned that abundant cheap credit — a side-effect of ultra-loose monetary policy — is keeping unviable companies alive, posing risks to competitiveness.
Slovenian central bank chief Bostjan Jazbec has meanwhile said that even talk of modifying QE is a “long way” into the future as the scheme was actually generating positive results.
Central bankers have also argued that there are limits to how much monetary policy can achieve and that trying to push up inflation while the global commodity index has dropped by a third in 15 months overburdens monetary policy.
The ECB cannot fight China’s slowdown while the eurozone’s sizable current account surplus, also largely outside the central bank’s control, is underpinning the euro’s value versus other currencies, which itself dampens inflation.
“With the underlying upward pressure on the euro ... this status quo might not last all the way through winter, so some move on QE could very well be in the cards early next year,” UniCredit economist Erik Nielsen said.