Euro zone inflation edges up, swift ECB action seen less likely

BRUSSELS Wed Apr 30, 2014 7:08am EDT

Bundles of euro banknotes move along a conveyer belt at the GSA Austria (Money Service Austria) company's headquarters in Vienna July 22, 2013. REUTERS/Leonhard Foeger

Bundles of euro banknotes move along a conveyer belt at the GSA Austria (Money Service Austria) company's headquarters in Vienna July 22, 2013.

Credit: Reuters/Leonhard Foeger

BRUSSELS (Reuters) - Euro zone inflation rose in April, reducing chances the European Central Bank will act soon to ward off deflation, but the pace of price rises was below forecast and still within the ECB's "danger zone" of under 1 percent.

Annual consumer inflation in the 18 countries sharing the euro nudged higher to 0.7 percent in April from March's 0.5 percent, which was the lowest since late 2009, the European Union's statistics office Eurostat said on Wednesday.

The reading was lower than the 0.8 percent predicted in a Reuters poll despite higher spending over the Easter period, reflecting the poor state of the euro zone economy after a long recession and with unemployment at near-record levels.

The euro briefly fell to a two-month low versus sterling on the data but then recovered, with some traders saying they expect markets to gain because the immediate chances of radical steps by the ECB are now lower.

Faced with inflation rates running far below target, the ECB has opened the door to money printing with so-called "quantitative easing" (QE) to boost the euro zone economy, which is growing at a slower rate than much of the rest of the world.

Some economists expect the ECB to follow other major central banks like the U.S. Federal Reserve and embark on some form of QE later this year, but others say it is a long way off because the euro zone is nowhere near the most serious kind of deflation such as that which took hold in Japan in the 1990s.

April's reading takes inflation back to where it was in February but it is below the 1.2 percent of April 2013.

Still, the lack of a clear up-tick in consumer prices will keep pressure on the ECB to act to stimulate the economy, possibly by lowering rates again, although it is not expected to do so at its next policy meeting on May 8.

"I don't think it's (the inflation reading) enough below expectations in the ECB's forecasts to see them jump into cutting the deposit rate at next week's meeting," said Paul Robson, a senior strategist at RBS.

"They will probably wait until updated forecasts are due in June. That will give them a better idea for the outlook. Core inflation was in line with expectations, which gives them a little cover to not do anything."

"COMPELLING CASE" FOR ACTION

The ECB is due to publish updated staff forecasts for inflation and growth stretching through to 2016 when its policymakers meet in June.

Consumer inflation excluding volatile energy and food costs was a touch higher this month than in March at 1.0 percent, while Spain pulled out of deflation territory in April.

But while April improved overall because of a smaller fall in energy prices, the pace of price rises in food, alcohol and tobacco was lower than the month before, showing Europeans remain unwilling to spend while economic growth is fragile.

The central bank targets inflation of just below 2 percent over the medium term and the International Monetary Fund wants to see the ECB take radical steps that could include quantitative easing.

"We continue to believe that there is a compelling case for additional monetary policy accommodation," said Ken Wattret, an economist at BNP Paribas. "We forecast lower policy rates in June, with asset purchases to follow in the second half on the back of continued low inflation prints over the summer."

The euro zone's economy is expected to grow just 1.2 percent this year after two consecutive years of recession, improving to 1.8 percent growth in 2015, according to the European Commission, the EU executive.

Last week, ECB chief Mario Draghi said that only a deteriorating inflation outlook or a loosening of medium-term inflation expectations would be reasons to start broad based asset purchases [ID:nL6N0NG2QJ]

(Additional reporting by Paul Carrel in Frankfurt; Editing by Jeremy Gaunt)

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