Eurozone inflation of 3pc threatens rate cut by ECB
Published 01/10/2011 | 05:00
EUROZONE consumer-price inflation jumped unexpectedly to 3pc in September, its highest level in almost three years, heaping doubt on bets that the ECB will cut interest rates next week.
In an estimate from the EU's statistics agency, Eurostat, the inflation figure for the 17 countries that share the euro increased from 2.5pc in August to its highest level since October 2008.
"It's not a nice number but I wouldn't panic," said Martin van Vliet, an economist at ING, who sees inflation moving lower over the next few months as oil and food prices ease. "Still, I think today's figures will mean the ECB does not lower interest rates next week."
Expectations had been growing among investors of a possible interest rate cut to support the weakening European economy as the region's debt crisis and government spending cuts sap business confidence and raise the spectre of another recession.
Other data out yesterday highlighted the extent of Europe's slowdown.
German retail sales fell at their fastest monthly pace in more than four years in August, tumbling 2.9pc on the month as fears of the eurozone debt crisis spiralling out of control weighed on consumer sentiment, while French consumer spending was flat over July and August.
Investment bank JP Morgan said last week it sees the ECB cutting rates by 50 basis points to 1pc next week. A Reuters polls of 76 economists this week found 56 forecasting no move at president Jean-Claude Trichet's last meeting but a majority expecting a cut in early 2012, following two rate rises this year.
The ECB changed its tone at its last rates meeting in early September and opened the door to cuts, signalling that it had halted a cycle of interest-rate rises begun five months ago.
Mr Trichet said then that there were "intensified downside risks" for the eurozone's economy and the bank expects inflation to be below 2pc in 2012.
Many economists say Mario Draghi, who takes over from Mr Trichet in November, would benefit from a cut just before he starts his term or risk being painted as a policy dove if the move is left to him.
But for Mr Trichet to use his swansong to cut rates while inflation is so far above the ECB's target of close-to-but-below 2pc would run against the grain of the central bank.
The eurozone may have to wait for further signs of slowdown, and easing prices pressures, before it gets looser monetary policy -- although both look set to happen.
"The downturn has eased commodity prices . . . Consequently, we should see an easing of energy price inflation, the largest contributor to headline inflation in past months," said Clemente De Lucia, an economist at BNP Paribas. (Reuters)