* Inflation falls to 0.3 pct y/y in Aug as expected
* ECB under pressure, but no move expected on Sept. 4
* Euro zone inflation stuck in 'danger zone' since Oct 2013
* Unemployment stable at 11.5 pct in July
* For GRAPHICS: link.reuters.com/kuj24s
* For inflation TABLE:
(Update with ECB, markets)
By Martin Santa and Eva Taylor
BRUSSELS/FRANKFURT, Aug 29 Euro zone inflation
dropped to a fresh five-year low in August, data showed on
Friday, something likely to concern the European Central Bank
but not force it into immediate policy action.
Consumer prices in the 18 countries using the euro rose by
just 0.3 percent year-on-year in August, the smallest increase
since October 2009, the European Union's statistics office
Eurostat said. The number matched market expectations.
The ECB targets an inflation rate at below-but-close to 2
percent over the medium term, a level not seen since the first
quarter of 2013. It also considers anything below 1 percent over
time to be in a "danger zone".
Inflation moving ever closer toward zero, a stagnating
economy, a double-digit unemployment rate and increasing signs
of reform fatigue among euro zone governments are posing a tough
challenge for the ECB that it says it cannot solve alone.
In a landmark speech at a central banker gathering in
Jackson Hole last week, ECB President Mario Draghi said it would
be "helpful for the overall stance of policy" if fiscal policy
could play a greater role alongside the ECB's monetary policy.
He got backing on Thursday from German Finance Minister
Wolfgang Schaeuble, who told Bloomberg that monetary policy
could only buy time and had run out of tools, calling instead
for more investment without running excessive deficits.
Others believe the ECB should do more to stimulate growth.
"This is yet another bad indicator of the health of the euro
zone economy," said Aberdeen Asset Management Investment Manager
Luke Bartholomew. "We are now relying on Draghi the politician
not Draghi the economist to get Europe out of this mess."
"He is walking a tightrope between conservative European
institutions and the markets desire for more stimulus. But as
every month passes we get closer to the dread of deflation and
Draghi looks more and more like Nero fiddling while Rome burns."
The euro rose to the day's high of $1.3195 as
investors trimmed bets against the currency after the data and
German Bund futures fell.
The drop in August inflation was led by a 2.0-percent
decline in the highly volatile prices of energy. Prices of food,
alcohol and tobacco fell by 0.3 percent for a second month in a
row in August. Core inflation, which strips out such volatile
components, rose to 0.9 percent from 0.8 percent.
"Core inflation resilience at just below 1 percent confirms
that outright deflation remains unlikely," said Marco Valli,
chief euro zone economist at UniCredit.
In a separate data release Eurostat said that unemployment
in the euro zone was, as expected unchanged at 11.5 percent for
a second months in a row in July, leaving 18.4 million people
without jobs in the 9.6 trillion euro economy.
ONLY WORDS, NO ACTION
Attention now shifts to the ECB's September policy meeting
next Thursday where the inflation reading is set to liven up the
debate in the Governing Council. Analysts expect a more serious
discussion about possible large-scale asset purchases.
Commerzbank now sees a 60-percent chance that the ECB will
embark on quantitative easing (QE) in the next 12 months ,
spending billions of euros on private and sovereign debt to
boost growth and inflation, up from an earlier 40 percent.
"QE is now our baseline scenario," said Commerzbank
economist Joerg Kraemer, mainly because of the weakening growth
prospects for the currency bloc, although he does not expect the
ECB to take fresh action on Thursday.
"We expect at best a modification in the wording compared
with the August meeting rather than ECB action," he said.
Sources told Reuters on Wednesday that new action on
Thursday was unlikely but not impossible.
A Reuters poll on Thursday put a 40-percent chance on the
ECB conducting QE through the purchase of sovereign bonds by
March next year.
ECB policymakers have said in recent weeks the ECB wanted to
see the impact of its June stimulus package first before
considering further steps. It will offer banks new four-year
loans from September and may decide to buy securitised loans.
Expectations the ECB could activate QE, its most powerful
tool yet, intensified after Draghi's Jackson Hole speech in
which he said financial markets indicated a "significant decline
at all horizons" in inflation expectations, adding the ECB would
use "all the available instruments" to ensure price stability.
Such a step is, however, highly contested by some ECB
Governing Council members, who worry about moral hazard, while
others question the effectiveness of such a policy tool that is
likely to cost the ECB billions of euros.
(Reporting by Martin Santa and Eva Taylor, Editing by Jeremy