The inflation rate slumped in at -0.2 percent last month for the first time since May 2016, putting further pressure on the European Central Bank to inject yet more stimulus to generate price growth which has undershot its target for over seven years.
Teeuwe Mevissen, Senior Market Economist at Rabobank in Amsterdam, said: “It gives the central bank more reason to continue what it has been trying to do for a while now, which is to get price levels up. From today’s figures, you can conclude that they have not been very successful.
“The ECB has signalled that they would not like to lower interest rates any further.
“So any changes in policy would likely be to step up purchases of government bonds even further.”
A recovery in local manufacturing activity continued through August, a survey showed.
Financial stocks, particularly EU banks, were set for a second straight day of losses.
Rabobank’s Mevissen said recent selling in financials was driven by expectations of an increased amount of bankruptcies in the second half of the year, due to the impact of the coronavirus.
But President Luis de Guindos said the eurozone economy has experienced a strong recovery in the third quarter even though the most recent incoming data have been less robust.
European Central Bank Vice Commerzbank analyst Esther Reichelt said inflation data highlights the difference between the Fed and the ECB.
He said: “Whereas the market considers the Fed capable of rekindling inflation rates by leaving interest rates lower for longer than previously assumed, this does no longer seem to be the case as far as the ECB is concerned,” she wrote in a note to clients.
“Inflation data for August published today will once again underline by how much the ECB will miss its inflation target.
“Just as higher inflation is damaging for the dollar, the euro is benefiting from lower inflation if monetary policy is unwilling (or unable) to do anything against it.”
Paul Donovan, chief economist at UBS Global Wealth Management said Tuesday’s data was likely to have limited impact because “markets are convinced interest rates will remain low for longer, and price data is unlikely to change that”.
It comes as the pan-European STOXX 600 index rose 0.7 percent, taking some support from better-than-expected Chinese manufacturing data. China-sensitive sectors such as basic resources and automobiles rose about 1 percent each.
Despite a 2.9 percent gain in August, the benchmark index still lagged its Wall Street peers.
Signs of a stalling economic recovery have put the STOXX 600 in a tight trading range since June.