Euro zone inflation at 16-month low


Euro zone inflation held steady at a 16-month low in June, kept in check by a sharp fall in oil prices and supporting an already strong case for a near-term interest rate cut by the European Central Bank.

Consumer prices in the 17 countries sharing the euro rose 2.4 per cent year on year in June, EU statistics office Eurostat said today, the same rate as in May and as expected by economists in a Reuters poll.

The ECB left rates at a record low of 1 per cent earlier this month. But many economists expect it to cut borrowing costs at its July 5th meeting, taking place against a darkening economic backdrop and after EU leaders agreed new crisis measures overnight to tackle the region's debt crisis.

"There is no obstacle to an ECB rate cut from the side of inflation," said Christoph Weil, an economist at Commerzbank, who expects a cut next Thursday.

A Reuters poll showed that 48 out of 71 economists expect the ECB to cut rates, in theory making it cheaper for the euro zone hard-pressed households and firms to borrow.

ECB president Mario Draghi has so far argued that it is up to governments - not the bank - to take steps to help calm the crisis that has intensified in recent weeks as Spain and Cyprus have become the fourth and fifth countries to seek a European rescue.

But the pressure appeared to be back on the ECB after euro zone leaders agreed in the early hours of today to take action to try to bring down Italy and Spain's borrowing costs and to create a single supervisory body for euro zone banks.

Data also showed today that loans to euro zone households and companies shrank in May as banks have tightened credit requirements, meaning less money is easily available to revive the depressed economy.

"The monetary data released earlier today by the ECB... reinforce the view of moderate inflation over the medium term," said Martin van Vliet at ING. "The prospect of moderate inflation allows the ECB room for manoeuvre to cut its main policy rate further."

Another, less likely option for the ECB would be to provide more cheap long-term refinancing operations (LTROs), repeating a two-stage move that calmed markets early this year with over a trillion euro in loans.

An interest rate cut would not on its own do much for the economy, which only narrowly avoided sinking into recession in the first three months of this year, but the weak economy in turn ensures hidden inflation dangers are minimised.

"Sluggish economic prospects will limit wage, cost and price pressures," said Clemente de Lucia at BNP Paribas. "The unemployment rate has reached its highest level since the launch of the euro and, under the current economic environment, labour market conditions will continue to deteriorate."

After months of unexpectedly high consumer price pressures at a time when euro zone economies were stagnating, inflation dropped from 2.6 per cent in April as world oil prices fell.

In an abrupt change of course, Brent crude - trading above $120 a barrel earlier this year - is now just above $90 and on track for its worst quarterly performance since the 2008 financial crisis.

Concerns among businesses and investors that the euro zone's debt crisis is no closer to any lasting resolution has started to eat away at the resilience of the US and Chinese economies, stifling global growth and hitting oil.

"A rate cut will not prevent a deep recession in the euro zone," said Ben May, an economist at Capital Economics. "After all, the drop in the oil price is probably largely as a result of the recent run of weak global economic data and growing fears that Spain requires a full sovereign bailout."