The euro area's stubbornly low inflation could persuade the European Central Bank to cut its interest rates again, but analysts are divided whether it will actually do so when its governing council meets Thursday. Some had been betting on a further reduction in borrowing costs this month given the worryingly low level of inflation in the 18 countries that share the euro.
But, for now, the spectre of deflation - the destructive spiral of falling prices in which consumers put off purchases, thus destroying salaries, jobs and investment - is being kept at bay, just.
The latest data compiled by the EU's statistics agency Eurostat put area-wide inflation at 0.8 percent in February, the same level as in January
While that is admittedly still way below the ECB's target of just under 2.0 percent, it was fractionally better than the 0.6 percent that many economists had been predicting.
Hence, the ECB may hold off from cutting rates again for now, analysts suggested. "The eurozone inflation rate unexpectedly stuck at 0.8 percent in February and the core inflation rate actually rose to 1.0 percent. This weakens the position of the doves in the ECB governing council," said Commerzbank economist Joerg Kraemer.
"The decision on interest rates on Thursday is therefore quite open, although the ECB will probably lower its inflation projections for 2014 and 2015," Kraemer said.
Many ECB watchers believed the ECB's governing council held off cutting rates at its previous meeting in February in anticipation of its updated staff economic projections, also scheduled for publication on Thursday.
"February's inaction was most certainly not a signal that the ECB has run out of policy ammunition or is unprepared to deploy its remaining weapons. Rather, the decision appeared to be mainly driven by matters of timing," said Capital Economics economist Jonathan Loynes.
Economists are concerned that the 18 countries that share the euro could find themselves slipping into deflation. But ECB chief Mario Draghi insisted last week that while eurozone inflation is low, he saw no danger of deflation as there was no "evidence of consumers postponing expenditure plans". Even though current inflation rates "can clearly not be considered close to 2.0 percent... we are clearly not in deflation, which is defined as a self-reinforcing fall in prices that is broad-based across items and across countries," Draghi said.
But the ECB chief - who has repeatedly vowed to do everything needed to get the eurozone economy back on its feet - acknowledged that inflation remaining low for a prolonged period of time "is a risk in itself". And so a number of central bank watchers are convinced the ECB could act now.
"After its wait-and-see attitude in February, we expect the ECB to ease monetary conditions at its March meeting," said BayernLB economist Stefan Kipar. The central "refi" refinancing rate, currently at an all-time low of 0.25 percent, could be pared back to just 0.1 percent, Kipar suggested.
But the bank would hesitate to bring down another of its key rates, the deposit rate which currently stands at zero percent, into negative territory, Kipar said. Such a move - which would require banks to pay for parking their money with the ECB - would be unprecedented and could have unforeseen circumstances.
But Draghi has repeatedly said the ECB is technically prepared to do so. Nevertheless, "the latest comments by council members Ewald Nowotny, Benoit Coeure and Christian Noyer suggest that opinions differ widely on this point in particular," Kipar said.
"In a nutshell... prospects for inflation have not changed much since February and we suspect the ECB council will decide to remain on hold," concluded Newedge Strategy analyst Annalisa Piazza.
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