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News : EU Economy Last Updated: Apr 1, 2014 - 7:58 AM


Eurozone closer to deflation as annual inflation dips to 0.5%
By Michael Hennigan, Finfacts founder and editor
Mar 31, 2014 - 9:16 AM

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Eurozone annual inflation is expected to be 0.5% in March 2014, down from 0.7% in February, according to a flash estimate today from Eurostat, the statistics office of the European Union.

Looking at the main components of Eurozone inflation, services is expected to have the highest annual rate in March (1.1%, compared with 1.3% in February), followed by food, alcohol & tobacco (1.0%, compared with 1.5% in  February), non-energy industrial goods (0.3%, compared with 0.4% in February) and energy (-2.1%, compared with -2.3% in February).

The official ECB inflation target is "below but close to 2%" and last week, the cost of borrowing for peripheral economies plunged amid expectations that the European Central Bank will be forced to start buying government bonds to head off deflation fears.

Yields on 10-year Portuguese government bonds, which move opposite to prices, fell below 4%  for the first time since early 2010 on Friday while Spanish 10-year yields dropped to a near decade-low of 3.24% as inflation in March was forecast to have fallen by 0.2%.

Luis Linde, the governor of the Bank of Spain, in a speech warned that the risk of deflation was “not zero”.

He added: “If you ask me whether there is a high probability [of deflation], I would say no. But even if the probability is low, the ECB should take measures to anticipate this, with a stronger monetary relaxation. Interest rates are low now, but they could be lower still.”

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