* German inflation eases to 0.9 pct on energy price drop
* Raises euro zone deflation fears, pressure on ECB to act
* Yet economists say may pick up in April, not time to panic
(Recasts with pan-German data, new economist quotes)
By Sarah Marsh and Eva Taylor
BERLIN/FRANKFURT, March 28 A key measure of
German inflation unexpectedly dropped in March, raising pressure
on the European Central Bank to stop any drift toward deflation
in the euro zone.
Germany's harmonised index of consumer prices (HICP) - a big
component of the inflation measure tracked by the ECB - showed
inflation slowing to 0.9 percent on the year, undershooting the
consensus forecast in a Reuters poll of economists for it to
hold steady at 1.0 percent.
A separate reading on Friday showed Spanish national
consumer prices fell at their fastest annual pace in almost
four-and-a-half years in March.
Both figures suggest inflation for the whole euro zone, due
on Monday, could fall even below the 0.6 percent Reuters
consensus forecast. The ECB's target is just below 2.0 percent.
Annual inflation in the euro zone has been in what ECB
President Mario Draghi has called the "danger zone" below 1
percent for five months, but the ECB expects inflation to get
closer to its target over the course of the next few years.
"At the very least the ECB will think harder about their
monetary policy stance and they might open the door to some kind
of liquidity measure or another strengthening of the forward
guidance," said Frederik Ducrozet, senior economist at Credit
"Even if we get a 0.6 percent reading for the euro zone
annual inflation reading on Monday, that is not the smoking gun
for a rate cut as early as next week," he added.
The ECB so far sees only a limited risk of deflation in the
euro zone, but has started to pay closer attention to the euro
exchange rate and its impact on price developments.
If the euro strengthens further against the dollar, it would
make imported goods cheaper and thereby put further downward
pressure on inflation.
NOT TIME TO PANIC YET
For now the ECB sees lower energy prices as a key reason for
low inflation, which it expects to remain around levels just
below 1 percent in coming months.
The data on Friday showed energy prices in Germany were down
1.6 percent on the year in March, after dropping 2.7 percent in
February and 1.8 percent in January.
Another factor in easing inflation was the fact Easter,
which traditionally raises pressure on prices in some areas such
as leisure, did not fall in March. As a result, economists said
they expected inflation to pick up slightly in the coming month.
ING economist Carsten Brzeski said the inflation data did
not signal deflationary tendencies in the German economy.
"To the contrary, inflation data should rather be filed
under Mario Draghi's famous label 'with low inflation, you can
buy more stuff'," he said.
"Unless energy prices unexpectedly drop further, today's
reading should mark the trough in German headline inflation this
year. Due to reversed base effects, headline inflation should
increase in the coming months before flattening out over the
summer months," he said.
German HICP rose 0.3 percent on a monthly basis, below a
forecast for a 0.4 percent gain, while non-harmonised Germany
inflation data also came in below forecasts.
On the year, the consumer prices index (CPI) was up 1.0
percent, below the estimate of 1.1 percent and February's 1.2
percent. The CPI was up 0.3 percent on the month, below a
forecast 0.4 percent.
(Editing by Toby Chopra)