The Wall Street Journal"Euro-zone inflation fell to just 0.5% in March according to Eurostat's flash estimate released Monday, the lowest since November 2009. So-called core inflation, which excludes volatile prices for energy, food, alcohol and tobacco, came in at 0.8%, broadly in line with recent months' readings. The headline rate is far below the ECB's target of "below, but close to" 2%, and just shy of economists' consensus forecast of 0.6%.
But the ECB has good reason to stay its hand and will likely stand pat when policy makers meet Thursday.
First, the March number may be distorted and prove to be a trough in inflation, at least for the near term. Seasonal effects related to Easter, which fell in March last year but is in April this year, may mean that inflation will revive in April, as prices for air tickets and hotels rise. Meanwhile, the decline in energy prices—they were down 2.1% year —is expected to ease in coming months. Those two effects should lead to higher inflation readings.
Second, the ECB has maintained a consistent line in recent months. It has started to focus more on the welcome pickup in growth in the euro zone. And it also has noted that much of the downward pressure on inflation has been due to food and energy prices—about which it can do little—as well as the strength of the euro, which weighs on import prices.
Economic data have continued to suggest a gentle acceleration in the pace of growth, with the European Commission's Economic Sentiment Indicator for March coming in at 102.3, above the long-term average and at its highest level since 2011. Over time, the single currency's strength should fade, especially as the debate in the U.S. moves toward rate hikes, which will come far earlier than in the euro zone. The euro's trade-weighted exchange rate has eased in recent days, and is now up just 0.3% this year.
A flurry of speeches by ECB officials in recent days has led some to suggest that the central bank may actually be closer to taking action. In reality, policy makers have simply restated the options available to them.
The most significant measures that could be taken, such as imposing a negative rate on the central bank's deposit facility, or engaging in some form of quantitative easing, continue to have risks attached to them. In particular, QE seems likely to be a last resort. And ultimately, spurring the ECB into action would require a clear deviation from its baseline scenario, which foresees a very slow recovery in inflation back toward 2%, perhaps in 2016.
