ECB: Surprised by sharp slowdown in inflation

Inflation in the eurozone has slowed much more sharply than expected and could prove a headache for banks and growth, European Central Bank deputy president Vitor Constancio said on Wednesday. Presenting the ECB's half-year financial stability report, Constancio told a news briefing that there had been "a very quick decrease, quicker than foreseen" in inflation across the 17-nation single currency area. "1.2 percent in April was a surprise," Constancio said, adding the ECB was "monitoring the speed of the decline". The phenomenon could render the situation on economic growth in the euro area "more complex" and make it more difficult for banks to maintain their margins, he argued. Eurozone inflation slowed abruptly to 1.2 percent in April from 1.7 percent in March, according to the EU's statistics office Eurostat last month. May inflation data are scheduled to be published on Friday. The ECB defines price stability as an annual inflation rate of close to but just below 2.0 percent. Constancio said that financial stability in the euro has improved in recent months. A number of positive points had been observed, such as a reduction in stress in the financial sector, a fall in sovereign bond yields and spreads of distressed countries, increased bank deposits and capital and reserves, lower bank funding costs and reduced reliance of banks on the eurosystem of central banks for financing. "Nevertheless, the situation remains fragile," Constancio said.