Slowing inflation keeps rates stable
INFLATION in the eurozone slowed last month, suggesting that the European Central Bank will not need to raise interest rates this year or perhaps in 2011 to keep inflation below the bank's 2pc target.
The European Union statistics office in Luxembourg confirmed yesterday that consumer prices in the 16-country area rose 0.9pc in the 12 months to February, after a 1pc increase in the 12 months to January.
"The general view is that headline inflation will remain at current levels of around 1pc," said Rainer Guntermann, an economist at Commerzbank.
Month-on-month prices grew by 0.3pc, driven mainly by more expensive package holidays and clothes, while fuel and food had the biggest downward impact. The ECB wants inflation to be just below 2pc year-over-year over the medium term.
Core inflation, which excludes volatile food and energy prices, slowed to a record low of 0.8pc year-on-year from 0.9pc in January.
The data "reinforces our belief that the ECB will hold off from raising interest rates from the current level of 1pc until 2011, given likely uneven and gradual overall eurozone growth," said IHS Global Insight economist Howard Archer.
While most of the eurozone is still seeing some inflation, Ireland saw deflation with prices tumbling 2.4pc in the 12 months to February, the biggest price drop within the zone. Inflation in Greece jumped 2.9pc over the same period.
The ECB left the rate unchanged at a meeting earlier this month, when ECB President Jean-Claude Trichet said he expected price increases to remain "subdued" this year.
"We have disinflation pressure everywhere, in all countries, on all fronts," said Karsten Junius, an economist at Frankfurt-based Dekabank.
"We'll see slowing core inflation over the coming months, which should push any expectations for a rate increase far away for now."
A separate report yesterday showed that German investor confidence declined less than economists forecast in March which is likely to be reflected in lower consumer sales in Germany's biggest economy.
Food prices declined 1.1pc from a year earlier and housing costs dropped 0.2pc, while energy prices rose 3.1pc. Energy costs have climbed as crude oil prices surged 70pc over the past year.
Alcohol and tobacco was 4.3pc more expensive from February 2009. Euro-region inflation will probably average 0.8pc in the current quarter before accelerating to 1.3pc in the three months through June, the European Commission forecast last month. (Additional reporting Bloomberg)