November 29, 2013 / 10:13 AM / 5 years ago

Price growth and jobless fall eases pressure on ECB to act

BRUSSELS (Reuters) - A pick-up in inflation this month eases pressure on the European Central Bank to act next week, and the first fall in unemployment in almost three years shows a tentative euro zone recovery is gaining traction.

A pedestrian walks past an employment centre in London August 17, 2011. REUTERS/Suzanne Plunkett

The double dose of data lent credence to the ECB view that the 17-country bloc is undergoing a gradual economic recovery more than five years after a financial crisis erupted, forcing five countries to seek emergency aid from their neighbors.

Consumer price inflation - the rate of increases in the cost of shopping and paying household bills - rose in the euro zone by 0.9 percent in November, slightly more than economists had predicted.

That put the annual inflation rate, measured on a basket of goods including cigarettes, beer and gas bills, on an upward path after an unexpected slip in October. While energy prices fell, the rising cost of food drove up the overall index.

The European Union’s statistics office Eurostat also said on Friday that the euro zone jobless rate fell in October to 12.1 percent from the previous month’s 12.2 percent, the first fall since February 2011.

“For the ECB, both indicators provide welcome news as they are preparing for next week’s meeting,” said Berenberg bank economist Christian Schulz.

The ECB, which holds a policy meeting next Thursday, cut interest rates earlier this month to a record low of 0.25 percent after inflation tumbled to 0.7 percent in October - far below its target of just under 2 percent.

Some ECB policymakers have since floated the idea of taking additional, less orthodox policy action to support the economy - such as asset purchases, or quantitative easing (QE).

But Benoit Coeure, a member of the six-man Executive Board that forms the nucleus of the ECB’s policymaking Governing Council, played down any immediate prospect of the bank embarking on a large-scale QE program.

“Outright asset purchases is one of the tools that the ECB can use to implement its monetary policy, so it is in principle possible,” Coeure told Japanese business newspaper Nikkei when asked about his views on QE.

“But if the question is, should the ECB resort to large-scale asset purchases the way the Fed or Bank of Japan have done it, then I don’t think this is warranted given the current prospects for inflation,” he added.

The ECB did not see a deflation threat for now, he added.


The fall in unemployment was better than economists had forecast and the news follows an encouraging recovery in optimism, despite shrinking loans to consumers and businesses in the bloc.

Economic sentiment in the 17 countries using the euro strengthened by 0.8 points to 98.5 in the seventh straight month of gains, according to a European Commission survey on Thursday, beating economists’ expectations.

The business climate reading turned positive for the first time since March last year.

But wide divergences remain in the economic health of euro zone members. Greece, Cyprus and Ireland suffered deflation in October, while French business confidence fell in November.

Similar divisions exist in employment.

While just 5 percent of Austrians are unemployed, 27 percent of Greeks and Spaniards are without a job. In total, an unprecedented 19 million people are out of work.

“The euro area is early on in the climb out of the crisis. The summit is still far and covered in fog,” ECB Executive Board member Yves Mersch said in Frankfurt.

The sharp differences between euro zone countries, both in price rises and unemployment, present the ECB with a conundrum.

But its power to remedy this widening rift between prosperous countries such as Germany and struggling states including Portugal is limited.

By cutting the cost of borrowing or giving banks cheap loans, it may inadvertently help those countries who need it least, fuelling price rises in Germany while credit-starved consumers in Ireland stay reluctant to spend.

“It’s a major problem,” said Graham Bishop, an adviser to the European Commission. “We have a single currency but we don’t have a single economy.”

“Unlike in the United States, there is no political will to have permanent financial transfers to weak countries in Europe,” he said. “The differences are just something we’re going to have to live with.”

For further details of Eurostat data click on: here

Additional reporting by Paul Carrel in Frankfurt; Editing by Jeremy Gaunt

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