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July 22, 2017

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Eurozone inflation stays weak at 0.5% in June: Eurostat

By Ciline Loubette

BRUSSELS -- Eurozone inflation is still stuck at the lowest levels since the financial crisis, new data showed on Monday, highlighting the threat of deflation but analysts say the European Central Bank (ECB) is unlikely to ease policy further this week.

Deflation is such a threat that the ECB has moved into negative interest rates to get cash flowing, and authorities are closely watching inflation rates in the hope that it will edge up towards the bank's target.

But the European Union's statistics office Eurostat said in a first estimate that inflation across the 18-nation eurozone was 0.5 percent in June — the same level as in May.

This means that inflation is at the lowest level since the financial crisis of 2008-2009 nearly froze the market on which banks lend to each other and caused recession in several advanced economies.

ECB data released on Monday also showed that loans to the private sector in the eurozone fell by 2.0 percent in May, even faster than the 1.8-percent drop the previous month.

"June's weak eurozone inflation figure will add to pressure on the ECB to provide more policy support, particularly given recent signs that the recovery may already be slowing," said Capital Economics senior economist Jennifer McKeown.

"While the bank is unlikely to act again at its meeting this week, we think that it will ultimately implement a large scale quantitive easing (bond-buying) program to tackle the risk of deflation."

Inflation has been far below the ECB's target of just under 2 percent, threatening its main statutory obligation to ensure price stability.

Slow growth can be both a cause and consequences of unduly low inflation.

That is why the ECB has lowered its benchmark refinancing rate to 0.15 percent, and moved the deposit rate at which it pays banks for depositing money with it at minus 0.10 percent, meaning the banks are charged if they park money instead of using it.

When inflation rises above 2 percent in advanced economies, business and households begin to anticipate further rises, stoking so-called second-round inflation.

But when inflation is much below 1 percent for a long time, people delay purchases and investment in the belief that prices will fall further. That cuts demand, can cause recession, reduces demand and growth and increases unemployment in a vicious spiral which is difficult for central banks to reverse.

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