Inflation drop may spur ECB rates cut

Another fall in euro zone inflation has increased the likelihood of a cut in European Central Bank (ECB) interest rates at the end of the month.

Consumer prices in the euro zone fell by 0.1 per cent in July, reducing the annualised weighted average inflation rate to 2.8 per cent from 3.0 per cent in June.

The inflation figures released yesterday lead to renewed interest in the euro and the currency closed up $.0031 at $.9158.

With European inflation down for the second consecutive month from an eight-year high of 3.4 per cent in May, most economists now expect the ECB to cut interest rates in response to signs of slowing economic growth in the euro zone.

The markets expect a cut of a quarter to a half of a percentage point in the 4.5 per cent rate when the ECB meets on August 30th.

Lower energy prices and reductions in the cost of clothing and transport led to the fall in inflation for July.

Core inflation, which strips out food, alcohol, tobacco and energy prices, rose 0.1 per cent in July to reach an annualised rate of 2 per cent.

The headline European inflation rate is expected to continue to decline over coming months as the impact of last year's oil and petrol price rises unwind out of the index.

In addition, the impact of the foot-and-mouth crisis on food prices drove up European inflation in the early months of the year.

Bank of Ireland chief economist, Dr Dan McLaughlin, expects the headline European rate to fall to about 2 per cent by the end of the year and to about 1.5 per cent by the middle of 2002.

While the July headline rate remains well above the ECB target rate of 2 per cent, economists say that the downward trend will accelerate, allowing the ECB to move on interest rates. The ECB last cut its rate in May with a quarter point reduction, from 4.75 per cent.

The latest European figures show that the Netherlands had the highest inflation rate in the 12-member euro zone and in the 15-member European Union, with an annualised rate in July of 5.2 per cent.

Portugal has the second-highest rate at 4.3 per cent, followed by Greece at 4.2 per cent.

The Irish rate was down to 4 per cent from 4.3 per cent. France had the lowest rate in the euro zone at 2.2 per cent, while Britain had the lowest rate in the European Union, at 1.4 per cent.