Euro zone inflation dips, opens door to ECB cut

Tue Jan 17, 2012 5:56am EST
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By Robin Emmott

BRUSSELS (Reuters) - Consumer prices in the euro zone fell more than previously expected in December, the start of a retreat from a November peak that should give the European Central Bank more room to cut interest rates as the economy heads for recession.

Inflation in the 17 countries sharing the euro was 2.7 percent in December on an annual basis, revised down from an earlier estimate of 2.8 percent for the month, the European Union's statistics office Eurostat said.

"The pressure is abating although the risks from energy are still there," said Fabio Fois, an economist at Barclay's Capital. "We think the ECB could bring rates as low as 0.5 percent in March," he said.

The bank made two 25 basis points cuts after Mario Draghi took over as president in November before holding fire this month.

Many economists expect it to take rates below 1 percent for the first time ever in the coming months but comments by Governing Council member Ewald Nowotny published on Tuesday hinted that the bank was in no hurry to move again.

"We are all agreed that now the point is to allow these measures to take full effect. Only then will we take further decisions," he told the Wall Street Journal's German website.

"For the ECB 'We never precommit' always applies, but there are no plans whatsoever at the moment."

Reuters' latest polling of some 66 economists before the ECB met earlier this month suggested the bank will cut interest rates to a new record low of 0.75 percent in February or March.   Continued...