ECB may act to counter inflation

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Eurozone government bond yields plumbed record lows yesterday and the euro fell to its weakest in a year against the dollar on expectations the European Central Bank will act soon to counter low growth and slowing inflation.

The prospect of further stimulus, through an asset-buying programme known as quantitative easing, also buoyed stock markets. European shares rose again, building on two days of strong gains.

Fuelling the speculation of ECB easing, Italian Economy Minister Pier Carlo Padoan said Italy must lower its growth forecast for this year, and German consumer sentiment fell for the first time since early last year.

“When the (eurozone’s) largest economy is falling behind, this is very much increasing the chances of the ECB heading for further monetary measures, above all QE,” said DZ Bank strategist Daniel Lenz.

Eurozone inflation data due tomorrow are likely to show a new low for this cycle of just 0.3 per cent and add to the sense of urgency on policy.

ECB President Mario Draghi’s call last week for more action in both monetary and fiscal policy has markets betting further steps may come as soon as the central bank’s next policy meeting, on September 4.

The euro broke to an 11-month low of $1.3152 in Asian trade before recovering some ground.