A plunge in energy and food prices slowed euro zone inflation in November to just above the European Central Bank's target, official data showed, adding to expectations the ECB will continue to cut interest rates.
Consumer prices in the 15-country area fell 0.5 per cent month-on-month for a 2.1 per cent year-on-year rise, European Union statistics office Eurostat said today, confirming its earlier estimate of the annual rate.
"It looks odds-on that euro zone consumer price inflation will fall well below 1 per cent during 2009, and a brief period of deflation certainly cannot be ruled out," Howard Archer, economist at IHS Global Insight, said.
"While the ECB is currently keeping its cards close to its chest and indicating some reluctance to cut interest rates sharply further, we still believe that another reduction in January is more likely than not," he said.
Since October, the bank has cut rates by a total of 175 basis points to 2.5 per cent and markets are pricing in a reduction to 1.5 per cent by mid-2009.
But ECB President Jean-Claude Trichet has seemed reluctant to signal the bank was ready to continue cutting at such a fast pace despite a deepening euro zone recession, saying the ECB would like to see its previous cuts have some effect first.
"Such dampening of rate-cut expectations appears to be backfiring now, as it is pushing the euro higher, which will intensify the recession, raise the risk of undershooting the inflation target, and increase the need for monetary stimulus later in 2009," said Martin van Vliet, economist at ING.
The euro rose to $1.4125 as of 10.48am from $1.2548 on December 4th when the ECB's last, record rate cut of 75 basis points was announced, helped by the Federal Reserve slashing interest rates to between zero and 0.25 per cent yesterday to jumpstart the recession-hit US economy.
The ECB expects prices could fall year-on-year for a few months in mid-2009 because of a high comparison base against mid-2008, when oil prices peaked above $147 a barrel.
But it does not foresee deflation, which Mr Trichet has defined as a prolonged period of falling prices coupled with consumer expectations of further declines.
Reuters