Tags: Eurozone | Inflation | Rate | Cut

Eurozone Inflation Stays at 3 Percent, Could Delay Rate Cut

Monday, 31 Oct 2011 01:18 PM

Eurozone inflation was surprisingly high at 3.0 percent for a second straight month in October, the EU announced on Monday, prompting economists to postpone their bets for a central bank rate cut until December.

With Europe's economy cooling, economists had forecast consumer price inflation would fall after reaching a three-year high in September. But high food and oil prices and tax hikes in Italy kept it at the same level.

"It looks a bit like stagflation with negative growth and high inflation," said Peter Vanden Houte, an economist at ING. "That's not positive news."

In a first reading of inflation for the month, the European Union's statistics agency Eurostat said inflation was 3.0 percent in October, compared to a 2.9 percent forecast by a Reuters poll of economists.

Economists had expected the European Central Bank to raise rates as soon as this week to support Europe's economy, as evidence mounts that the region's debt crisis is sapping business confidence and raising the specter of recession.

The Organization for Economic Cooperation and Development slashed its 2012 growth forecast for the euro area to 0.3 percent from 2.0 percent in May.

Underscoring that, Eurostat said the jobless rate in the eurozone rose slightly to 10.2 percent in September from a revised 10.1 percent in August, nudged up by Spain, where unemployment reached 22.6 percent.

But stubbornly high inflation, above the Frankfurt-based central bank's target of close to, but under, 2 percent, is making a rate cut call much more difficult.

"We think interest rates will be on hold this week but we're expecting a rate reduction in December," said Nick Kounis, an economist at ABN AMRO.

Crude oil prices in euro terms were still around a third higher than in the same month last year. ING forecasts that if they continue at current levels, their impact on inflation will not dissipate until March.

MARIO'S MOMENT?

Adding to the cloudy outlook, Mario Draghi takes over as ECB president on Tuesday and may not feel comfortable lowering rates at his first meeting on Thursday, particularly with inflation more than a percentage point above target.

As an Italian at the helm of the ECB, Draghi will arguably be under more scrutiny from skeptical investors worried that a southern European might be less disciplined.

Last week Draghi warned of "a further weakening in growth prospects" but German members of the ECB's Governing Council remain focused on fighting inflation, partly driven by German folk memories of the hyperinflation the 1920s.

German council member Juergen Stark said on October 26 that interest rates at their current level were "adequate."

"The latest eurozone inflation and unemployment data might leave the hawks at the ECB concerned about underlying price pressures," said Jennifer McKeown, an economist at Capital Economics. "The rate has now been above the ECB's 2 percent price stability ceiling for 11 months running, perhaps suggesting that high inflation is becoming entrenched."

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Eurozone inflation was surprisingly high at 3.0 percent for a second straight month in October, the EU announced on Monday, prompting economists to postpone their bets for a central bank rate cut until December. With Europe's economy cooling, economists had forecast...
Eurozone,Inflation,Rate,Cut
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2011-18-31
Monday, 31 Oct 2011 01:18 PM
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