Euro-Zone Inflation Returns to Record Low; Slowing Price Growth Pressures ECB to Act Decisively to Head Off Deflation
FRANKFURT--Euro-zone inflation unexpectedly weakened in January, raising pressure on the European Central Bank to act decisively to prevent a debilitating period of excessively soft consumer prices, or even outright declines, that threaten to derail the region's fragile economic recovery.</br></br>The report came as Germany's conservative central bank signaled it backs additional measures to combat recent volatility in money markets. The Bundesbank favors ending the ECB's policy of draining funds from banks to offset its government bondholdings, a person familiar with the matter said.</br></br>That would raise the amount of surplus funds in the banking system, the person said, and anchor money-market rates, thus providing a more stable environment for banks to lend.</br></br>Consumer prices grew 0.7% in January from a year earlier in the euro zone, the European Union's statistics office Eurostat said Friday, well below the ECB's target of just below 2%. That was down from 0.8% in December and short of economists' expectations for a slight rise. Some economists expect it to weaken further in February.</br></br>Although January's figure wasn't far different from the previous month, it carries symbolic importance. The last time inflation fell so low, in October, the ECB responded with a surprise reduction in its key interest rate to a record-low 0.25%. The ECB meets Thursday, and while many economists expect the bank to stand pat, some say the inflation report increases the chances of immediate steps to convince financial markets that officials take the threat of deflation seriously.