Euro zone inflation rises, pressure remains on ECB

European Union

Euro zone inflation picked up in April, but remained below expectations, maintaining pressure on the European Central Bank (ECB) to stimulate the economy.

Consumer prices rose by 0.7 percent year-on-year in April, according to flash estimates released by Eurostat Wednesday, marking an uptick from March's 52-month low of 0.5 percent.

But the figure was still lower than analyst forecasts of 0.8 percent, and means inflation is still significantly below the ECB's target of close to 2 percent. April was the seventh month in a row that inflation in the 18-country currency bloc came in below 1 percent.

Read More ECB to get drastic? QE could be on the table

The euro fell sharply against the dollar following the data, but bounced back to trade higher in mid-morning London trade.

The euro zone-wide data came after preliminary data Tuesday showed that German annual inflation came in weaker than expected in April, rising by just 1.1 percent. Analysts had expected inflation of 1.3 percent in the euro zone's largest economy.

Deflationary concerns

Fears that the 18-country currency bloc was sliding towards deflation were ignited in October when data showed inflation had fallen to a 47-month low of 0.7 percent and the central bank cut interest rates at its November meeting to a record low of 0.25 percent in response.

Read More How real is the euro zone recovery?

Price growth, however, has continued to disappoint and remained well below the ECB's target level of just under 2 percent. This has led to increasing calls for ECB President Mario Draghi to boost the region's economy - and the latest inflation data is likely to heighten expectations of some action from the central bank on May 8.

"We would argue this bounceback in annual CPI (consumer price inflation) in the wake of March's soft print is small enough to ensure there is continued speculation of further ECB policy support but not so small as to guarantee a change in stance at the very next meeting," Rabobank strategists said in a note Wednesday.

"Neither will these numbers do much to refute Draghi's widely reported comments earlier this week that while the ECB is ready to embark upon QE (quantitative easing), such a program is not imminent."

There is growing speculation that the European Central Bank (ECB) may be considering an asset-purchase, or quantitative easing, program, in an effort to stump up the euro zone's economy, in what would be something of a drastic change in policy.

But on Monday, a source told Reuters that Draghi had told German lawmakers that quantitative easing remains a way off.

ECB officials have repeatedly stressed that they see only a limited risk of deflation across the euro zone, but Howard Archer, chief European economist at IHS Global Insight, said that inflation in the region was "highly unlikely" to move markedly higher any time soon.

"The specter of prolonged very low inflation destabilizing medium-term inflation expectations is a very real and troubling risk for the ECB and April's rise in euro zone consumer price inflation to 0.7 percent does not markedly dilute this risk," he said in a note.

Archer stressed that "considerable pressure" remained on the ECB, and added that he would not be surprised if measures aimed at boosting liquidity were unveiled at the central bank's meeting next week.

Bank Workers CharityBank Workers Charity - Supporting bank workers

Register for Financial Markets News Alerts