Eurozone inflation eases, boosts rate cut expectations

By Jan Strupczewski

BRUSSELS – Eurozone inflation eased from last year’s peaks of 3.0% in December, the first sign of a fall in price growth this year that analysts expect will create room for more interest rate cuts to help the weakening economy.

Jonathon Rivait/National Post

The European Union’s Statistics Office (Eurostat) estimated that consumer prices in the 17 countries sharing the euro rose 2.8% year-on-year in December, down from 3.0% year-on-year rises in November, October and September.

No detailed break-down of the numbers is available with the Eurostat estimate, but economists said the slower price growth was likely a result of lower energy prices.

“Looking ahead, further falls in inflation are likely,” said Ben May, economist at Capital Economics.

“Assuming that the oil price does not rise again, we see this component knocking about 1% off the headline rate in 2012. Food inflation should also slow as the effects of past rises in agricultural commodity prices fade,” he said.

“We expect the headline inflation rate to plunge well below the ECB’s 2% price stability ceiling by the middle of the year,” he said.

The European Central Bank cut its main interest rate back to a record low of 1% on December 8 to try to boost the economy as inflation pressures subside. Economists believe that with inflation falling, more interest rate cuts were likely soon.

“The favorable medium-term inflation outlook is a green light for further ECB rate cuts over the coming months. We expect the refinancing rate to reach a low of 0.5%,” said Nick Kounis, economists at ABN Amro bank.

Cheaper credit could help boost growth in the eurozone, where the economy expanded just 0.2% in the third quarter and economists expect that it contracted in the fourth.

They also think it might contract in the first three months of 2012, which would send the bloc back into recession after a two-year recovery from the worst global financial crisis since the 1930s.

“Consequently, we expect the ECB to respond to likely eurozone GDP contraction in the fourth quarter of 2011 and the early months of 2012 by cutting interest rates further,” said Howard Archer, economist at IHS Global Insight.

“Specifically, we forecast the ECB to trim interest rates by a further 25 basis points from 1.00% to 0.75% in the first quarter although we do not expect another cut as soon as the 12 January policy meeting,” he said.

© Thomson Reuters 2011

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