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Euro zone inflation sticks in 'danger zone', keeps ECB under pressure

A man makes his way past a replica of a one drachma coin outside the Athens Town Hall May 21, 2012. REUTERS/Yorgos Karahalis
A man makes his way past a replica of a one drachma coin outside the Athens Town Hall May 21, 2012. REUTERS/Yorgos Karahalis

BRUSSELS (Reuters) - A drop in March euro zone inflation to its lowest level since November 2009 was confirmed on Wednesday, keeping pressure on the European Central Bank to intervene if prices do not rebound.

The year-on-year inflation rate in the 18 countries sharing the euro was 0.5 percent in March, down from 0.7 percent in February, the European Union's statistics office Eurostat said.

It was the sixth straight month that inflation remained in what ECB President Mario Draghi called a "danger zone" of below 1 percent.

Core inflation, excluding energy, food, alcohol and tobacco dropped to 0.7 from 1.0 percent. Excluding unprocessed food and energy, inflation was 0.9 percent, more than the 0.8 percent economists had forecast but still less than February's reading of 1.1 percent.

Analysts believe inflation will pick up in April because travel prices typically rise over Easter, and Easter comes later this year. It came at the end of March in 2013.

"In April we expect a rebound in core inflation, 0.9 percent, as some of the Easter-related seasonal price increases are likely to come with a month's delay," said economist Gizem Kara at BNP Paribas.

In March, the biggest rise in prices was for tobacco, restaurants and bars as well as milk, cheese and eggs. Prices fell for heating oil, telecommunications and fuel.

Disparity across the euro zone was stark. Greece (-1.5 pct) and Cyprus (-0.9 pct) saw prices fall from last year. Inflation rates in Austria (+1.4 pct), Malta (+1.4 pct) and Germany (+0.9 pct) were nearer the ECB's target of close to but less than 2 percent.

Inflation has now been in the ECB's "danger zone" of less than 1 percent for six consecutive months, fuelling speculation that the ECB will need to take further action. However, economists say that inflation may have bottomed out in March.

"Apart from the later Easter effect likely to push up inflation in April, the year-on-year drop in energy prices may well have peaked and food prices could start to edge back up," said economist Howard Archer at IHS Global Insight.

ECB policy makers said the bank stood ready to deploy unconventional measures to ensure that inflation did not stay low for too long.

ECB's President Mario Draghi expressed concerns at the euro's strength on Saturday in Washington, trying to talk down the currency, which influences domestic prices.

The strength of the single currency against the dollar makes imports cheaper and pushes down the prices Europeans pay for goods and services.

While this can give households more purchasing power in the short run, the ECB wants to avoid a drop in inflation expectations.

(Reporting by Robert-Jan Bartunek and Martin Santa; Editing by Larry King)

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