Energy fuels euro inflation but ECB rate cut still on

Fri Sep 28, 2012 8:40am EDT
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BRUSSELS (Reuters) - Euro zone inflation accelerated in September as energy costs soared but core prices stayed low, likely leaving the European Central Bank on track to cut interest rates soon.

Consumer prices in the 17 countries sharing the euro rose 2.7 percent year-on-year, the European Union's statistics office Eurostat said on Friday in a first estimate that marked a rise from 2.6 percent in August.

Markets had expected inflation to ease to 2.5 percent.

Energy prices jumped 9.2 percent after a 8.9 percent rise the previous month.

Core inflation, excluding both energy and unprocessed foods, fell to its lowest level in a year of 1.7 percent in August, the latest month for which the data has been published.

Together with recent data indicating that the euro zone economy entered a recession in the third quarter, Friday's inflation reading kept intact expectations that the ECB will not wait long before delivering a growth-boosting rate cut.

"It seems highly likely that the ECB will take interest rates down from 0.75 percent to 0.50 percent in the fourth quarter," said Howard Archer, economist at IHS Global Insight.

"While the ECB could act as soon as its October meeting next Thursday, we lean towards the view that they will probably hold off to November."

Just 14 of 73 economists polled by Reuters this week expect the ECB to cut rates when it meets next Thursday but a majority expect the bank to have lopped off 25 basis points by the end of the year. <ECB/INT>   Continued...

People make their shopping at a supermarket in Lisbon August 30, 2011. REUTERS/Jose Manuel Ribeiro