Euro zone inflation remained at 0.5% in June

Monday 30 June 2014 12.19
Inflation remains in the 'danger zone' highlighted by ECB President Mario Draghi
Inflation remains in the 'danger zone' highlighted by ECB President Mario Draghi

Euro zone inflation remained stuck at levels last seen during the 2009 recession and lending to companies and households contracted again, data has shown today, further highlighting the bloc's feeble economic state.

Annual euro zone inflation stayed at 0.5% in June compared with last month, the European Union's statistics office Eurostat has said. 

Core annual inflation – excluding energy, food, alcohol and tobacco - inched up to 0.8%.

The reports - for June and May, respectively - underlined the reason for the European Central Bank's unprecedented policy steps earlier in June when it cut interest rates to record lows and promised to hand out more long-term loans to encourage banks to lend more freely.

It will take a while for the measures to take effect and they would not have influenced today’s releases. 

Details have not yet been announced for the long-term loans and most economists do not expect any fresh policy steps when the ECB meets on Thursday.

But there is no sign that the pressure on the ECB is easing.

"The ECB has just announced new measures to signal its readiness to bring inflation back to target and boost lending, but it will surely keep the door wide open to more measures at this week's meeting," said Berenberg Bank's Christian Schulz.

The static rate was slightly unexpected after annual inflation in Germany rebounded to 1% in June, which Berenberg's Schulz said suggested "a widening of the range of inflation rates between the core and the periphery".

Overall, euro zone inflation remains far below the ECB's medium-term target of just below 2% and has been stuck in what ECB President Mario Draghi has called the "danger zone" of below 1% for nine months in a row.

The ECB is worried that the euro zone's growth prospects will suffer if inflation stays too low for too long.

One of the ECB's main concerns is that banks in euro zone periphery countries are not lending sufficiently to companies and households and at higher rates than in the core countries.

This means the ECB's record low interest rates are not feeding evenly through to the real economy across the euro zone.

In May, Spanish banks lent €10.345bn less to companies and households than in the month before, ECB data showed. 

Lending by Italian banks declined by €7.843bn and by €567m in Portugal.

German, Finnish and Dutch banks increased lending in May.

The cost of borrowing also differs. While companies have to pay on average 3.65% for loans in Spain or even 5.39% in Portugal, German or Dutch firms pay around 2.5%, ECB data from April showed.

The ECB now plans to give euro zone banks the opportunity to borrow four-year funds from the ECB at possibly 0.25% for the four-year term, linking the offer to the size of their loan books, which it hopes will be an incentive to lend more.

The ECB may reveal details for these targeted long-term refinancing operations on Thursday.

It also aims to revive the market for securitised loans in Europe, which collapsed after the financial crisis and never really recovered since. 

The ECB said in June it had intensified preparations for possible purchases of asset-backed securities.