Euro zone inflation steady, room for ECB move

Fri Jun 29, 2012 7:39am EDT
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By Robin Emmott

BRUSSELS (Reuters) - 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 percent year on year in June, EU statistics office Eurostat said on Friday, 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 percent earlier this month. But many economists expect it to cut borrowing costs at its July 5 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 Friday 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 on Friday 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.   Continued...

Customers shop for groceries in a supermarket in London October 18, 2011. REUTERS/Neil Hall