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Euro Inflation Slows Tripping Up Chances of Bazooka Style Liquidity

Euro-area inflation slowed more than economists forecast in May, cranking up pressure on the European Central Bankto deploy measures as soon as this week to kindle prices and drive growth.

The rate fell to 0.5 percent from 0.7 percent in April, the European Union’s statistics office in Luxembourg said today. Themedian forecast in a Bloomberg News survey of 38 economists was for a decline to 0.6 percent. The rate has been less than half the ECB’s target for eight months.

With ECB President Mario Draghiwarning about the risk of a negative price spiral, the Governing Council is considering measures from negative interest rates to conditional liquidity for banks. The central bank is also contending with high unemployment, which unexpectedly decreased in April while remaining near a record, a separate Eurostat report showed.

“It’s a surprise, but not enough of a surprise to change materially the global economic outlook that the ECB will release on Thursday,” said Michel Martinez, an economist at Societe Generale SA in Paris. “What seems highly likely is that the ECB will cut key rates and probably also inject further liquidity.”

The euro erased losses against the dollar after today’s date were released, trading at $1.3610 at 12:14 p.m. in Brussels, up 0.1 percent on the day.

Of 50 economists surveyed by Bloomberg News, 44 expect the Frankfurt-based ECB to become the first major central bank to take interest rates into negative territory by cutting its deposit rate. All but 2 of 60 respondents said the benchmark rate would also be reduced.

‘Ready to Act’

The ECB has prepared investors for the prospect of stimulus ….”

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