We are not Japan

Euro-area inflation unexpectedly slowed in February, heaping pressure on the European Central Bank (ECB) to defend the region against falling prices.

The annual inflation rate in the 18 countries sharing the euro slowed to 0.7pc in February from 0.8pc in January, revised data from the EU's statistics office Eurostat showed.

This was the lowest annual rate of growth in four years, slowing down to the same pace that triggered a surprise interest rate cut by the ECB in November.

The latest figures pile yet more pressure on the central bank which has declined, thus far, to act.

A meeting of its Governing Council on March 6 decided to keep the benchmark interest rate at 0.25pc, still a record low, rather than drop it to zero.

Low interest rates encourage consumers to spend rather than save, pushing up demand and thus prices.

Four eurozone countries recorded negative annual inflation rates during the month – Portugal and Slovakia saw deflation of -0.1pc, Greece had -0.9pc and Cyprus saw annual deflation of -1.3pc.

The eurozone's rate of inflation has now been below 1pc for five months.

The ECB aims to keep inflation just below 2pc and has blamed the strength of the euro for helping to keep prices subdued. It expects inflation to only pick up slowly, to 1pc this year and 1.5pc in 2016.

The euro fell in reaction to yesterday's data, dipping against the dollar and paring gains against the yen. Yet the ECB considers the risk of eurozone deflation as "quite limited", its president Mario Draghi said last Thursday.

He rejected comparisons with Japan's experience of deflation which became so entrenched that companies and households held off on spending on expectations of lower prices ahead, leading to two decades of economic stagnation.

Mr Draghi did say, however, that the bank had been preparing additional policy steps to guard against possible deflation, and that the longer inflation remained low, the higher was the probability of deflationary risks emerging.

Also speaking on the matter in recent days was Bundesbank chief Jens Weidmann, who repeated the view that the risk of widespread deflation in the eurozone was very limited, adding that policymakers should not overload monetary policy to haul the bloc out of crisis.

Analysts don't expect action unless the situation deteriorates further.

"The downward revision to the February inflation figures is unlikely to be enough to trigger further near-term monetary easing," said Martin van Vliet, senior economist at ING.

"This will also require a deterioration of the activity and or a further significant strengthening of the euro."

Inflation could be "the new normal", he added.

"Today's CPI figures are a clear reminder that low inflation may have become the new normal for the eurozone – which certainly won't make it easy for some countries to reduce their debt overhangs," Mr Van Vliet said.

(Additional reporting by Bloomberg and Reuters)