Euro zone inflation eases, boosts rate cut expectations

Wed Jan 4, 2012 6:25am EST
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By Jan Strupczewski

BRUSSELS (Reuters) - Euro zone inflation eased from last year's peaks of 3.0 percent in December, the first sign of a fall in price growth this year that analysts expect will create room for more interest rate cuts to help the weakening economy.

The European Union's Statistics Office (Eurostat) estimated that consumer prices in the 17 countries sharing the euro rose 2.8 percent year-on-year in December, down from 3.0 percent year-on-year rises in November, October and September.

No detailed break-down of the numbers is available with the Eurostat estimate, but economists said the slower price growth was likely a result of lower energy prices.

"Looking ahead, further falls in inflation are likely," said Ben May, economist at Capital Economics.

"Assuming that the oil price does not rise again, we see this component knocking about 1 percent off the headline rate in 2012. Food inflation should also slow as the effects of past rises in agricultural commodity prices fade," he said.

"We expect the headline inflation rate to plunge well below the ECB's 2 percent price stability ceiling by the middle of the year," he said.

The European Central Bank cut its main interest rate back to a record low of 1 percent on December 8 to try to boost the economy as inflation pressures subside. Economists believe that with inflation falling, more interest rate cuts were likely soon.

"The favorable medium-term inflation outlook is a green light for further ECB rate cuts over the coming months. We expect the refinancing rate to reach a low of 0.5 percent," said Nick Kounis, economists at ABN Amro bank.   Continued...