Eurozone inflation falls to 15-month low

Posted on May 31, 2012

BRUSSELS, May 31 – Eurozone inflation eased further than expected to its lowest level in more than a year in May, giving the European Central Bank a little more room to lower interest rates amid fears of deep recession across the continent.

Many economists expect at least one 0.25 percentage point cut in coming months. Eleven respondents out of 73 in the latest survey thought a rate cut would come at a June 7 meeting.

    Consumer price inflation in the 17 nations sharing the euro fell to 2.4 per cent year-on-year in May from 2.6 per cent in April, the EU’s statistics office Eurostat said on Thursday. Economists polled by Reuters had forecast inflation of 2.5 per cent.

    It was the lowest level since February 2011 but still above the ECB’s medium-term target of close to, but below, 2 per cent.

    The ECB meets next Thursday for its June interest rate decision and a majority of economists predict a rate freeze until the end of 2013, although a growing minority see a rate cut before the end of this year.

    Economists said they expected inflation to fall further, with slowdowns in China and India reducing pressure on commodities, notably oil and food. A possible eurozone recession would make passing on price increases ever harder.

    Howard Archer, chief UK and eurozone economist at IHS Global Insight, said he believed the ECB would trim rates in the third quarter, with July a very real possibility.

    However, some policymakers have questioned the rationale of moving below the ECB’s current record low basic interest rate of 1 per cent, a view echoed by Van Lanschot economist Luc Aben.

    “We have to ask ourselves whether there would be a big difference if the ECB lowers rates to 50 basis points,” he said.

    “The problem of the eurozone is not expensive money, it’s far more structural than that. But I still think that the ECB will take a small step in the coming months.”

    Spain, weighed down by troubles in its banking system and heavily indebted regions, has called on the ECB to revive its bond-buying programme to help buy some time, but the call has fallen on deaf ears so far.

    ECB President Mario Draghi urged European leaders to clarify their vision for the euro quickly or risk disaster, saying the ECB could not fill the policy vacuum.

    Mr Draghi told the European Parliament on Thursday that the bloc should err on the side of doing too much to bring an end to more than two years of eurozone debt crisis.

    Economists have expected price rises to ease steadily as the economy stumbles and to offer some relief to households at a time of rising unemployment and sharp spending cuts. Oil prices have slipped almost 20 per cent since early March highs and 13 per cent during May.

    According to the European Commission’s economic sentiment survey on Wednesday, selling price expectations decreased significantly in all business sectors and consumer inflation expectations dropped to a 16-month low.

    Inflation in Germany and Spain fell below 2 per cent this month and in Belgium slipped below 3 per cent for the first time in a year and a half.

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