Europe’s inflation plunge adds to rate cut pressure

January 6th, 2009 - 10:06 pm ICT by IANS  

Berlin, Jan 6 (DPA) European inflation plunged to its lowest level in more than two years in December, data released Tuesday showed, adding to the pressure on the European Central Bank (ECB) to deliver further cuts in interest rates.Preliminary data released by the European Union’s (EU) statistics office showed annual inflation in what was then the 15-member eurozone dropped from 2.1 percent in November to a lower-than-forecast 1.6 percent last month.

This brought eurozone inflation down to its lowest level since October 2006 as falling oil prices helped to undercut inflationary pressures. Analysts had forecast that inflation in the currency bloc would slide to 1.8 percent last month.

The eurozone expanded its membership to 16 on Jan 1 when Slovakia adopted the euro as its national currency.

The ECB has been sending out a cautious message about what markets should expect from next week’s meeting of its now 22-head rate-setting council.

But with eurozone economic growth rapidly losing momentum and the ECB having set an annual inflation target of close to but below two percent, many economists believe that the Frankfurt-based bank will be forced to follow up last month’s historic 75-basis-points with another big reduction next week.

Faced with signs of a dramatic weakening of the eurozone economy, the ECB has trimmed borrowing costs in the currency bloc by 175 basis points since October.

Last month’s 75-basis-points reduction was the biggest rate cut since the notoriously cautious ECB took charge of eurozone monetary policy a decade ago and brought borrowing costs in the currency bloc down to 2.5 percent.

But expectations that the ECB will continue to cut rates triggered a fresh fall in the euro which slumped by 1.1 percent to $1.3443 ahead of the release of the inflation data.

The release of the so-called flash estimate for eurozone inflation is likely to be accompanied by the publication this week of another round of bleak European economic data with unemployment in Germany expected to rise and production and factory order books tipped to contract again.

At the same time, a closely watched European Commission, the legislative body of the EU, economic sentiment survey to be released Thursday is forecast to underscore the deepening sense of economic gloom in the eurozone.

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