Euro zone inflation plunge may vindicate cautious Draghi

A customer walks past the fruits and vegetables section in a Casino supermarket in Mouans Sartoux

BRUSSELS (Reuters) – Euro zone inflation plunged this month, likely vindicating European Central Bank President Mario Draghi’s cautious policy stance and proving that the bloc may still be years away from a sustained rise in consumer prices.

Inflation in the 19-member currency union fell to 1.5 percent in March from a four-year high of 2.0 percent in February, well below expectations for 1.8 percent as energy, food and services prices rose slower than last month, Eurostat said.

Underlying inflation, a measure closely watched by the ECB, meanwhile fell to 0.7 percent from 0.9 percent, all but erasing pressure on Draghi to tighten the ECB’s money taps soon, many months before its currency guidance.

When overall inflation hit the ECB’s target last month, conservative countries like Germany piled pressure on Draghi, calling for an end to the bank’s 2.3 trillion euro asset buying scheme.

But the ECB repeatedly rejected those calls, arguing that inflation has already peaked this year and will not return back toward its 2 percent target perhaps until 2019, as unemployment remains high, wage growth is anemic and the economy is still operating with significant slack.

Policymakers have also warned that small changes in the bank’s message earlier this month may have been overinterpreted as they pointed to reduced risks and not to the first step to the exit.

“Measures of underlying inflation in the euro area remain subdued and our projected path of inflation still remains highly conditional on our policy stance,” ECB Executive Board member Benoit Coeure, a key Draghi ally, said on Friday.

“This clearly suggests that current expectations on the intended horizon of our purchases… and on the sequencing of policy instruments, remain valid today,” Coeure said, referring to the bank’s expectation to keep rates at current or lower levels until well after the asset buys conclude.

But markets shrugged off the data with the euro and bonds yields trading broadly unchanged on Friday as investors have already priced in a cautious stance from the bank.

“This fall was much steeper than most analysts had forecast and should dampen speculation about an imminent exit of the ECB from its ultra-expansionary monetary policy,” Commerzbank economist Christoph Weil said.

“We will only see a sustained increase in the inflation rate when wages rise more strongly again. However, we do not expect this to happen before 2018,” he added.

The ECB next meets on April 27 and no policy change is expected, especially with the French election just weeks away.

The ECB now expects to buy 60 billion euros worth of assets until the end of the year and will decide in the second half of the year whether to continue or wind down the scheme next year.

(Reporting by Francesco Guarascio, Francesco Canepa and Balazs Koranyi; Editing by Philip Blenkinsop and Julia Glover)