BackEuro zone January inflation slows to 0.7% as energy prices drop
Consumer prices rose an annual 0.7% after a 0.8% gain in December; unemployment rate held at 12%
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Frankfurt: Euro-area inflation remained below half of the European Central Bank’s target in January, driven by falling energy prices, adding to the case for policy makers to cut interest rates next week.
Consumer prices rose an annual 0.7% after a 0.8% gain in December, the European Union’s statistics office in Luxembourg said on Friday. The median estimate in a Bloomberg News survey of 41 economists was for an increase to 0.9%. That’s the fourth consecutive reading of less than 1%. The Frankfurt-based central bank aims to keep inflation at just under 2%.
German 2-year bond yields fell to the lowest since November on Thursday after inflation in Europe’s largest economy came in below economists’ expectations, adding to evidence of weak price pressure in the euro region. President Mario Draghi unexpectedly cut the benchmark rate to a record-low 0.25% in November after inflation slowed to 0.7%.
While the growth outlook is improving for the currency bloc, the ongoing problems in the banking sector, which are manifested through ongoing credit contraction, will continue to act as a drag on both growth and inflation, said Colin Bermingham, an economist at BNP Paribas SA in London. This will put renewed pressure to act on the ECB.
Energy prices fell 1.2% after stagnating in December, according to Friday’s report. The core inflation rate, which strips out volatile items such as energy, food, alcohol and tobacco, rose to 0.8% from 0.7%.
ECB review
The euro-area unemployment rate held at 12% in December, a separate Eurostat report showed on Friday. That’s down from a high of 12.1% in September.
Lending to companies and households contracted for a 20th month in December, the ECB said this week, and vice president Vitor Constancio said that the central bank’s review of banks’ balance sheets this year may harm the still-nascent recovery in the region.
The ECB predicts the currency bloc’s economy will grow 1.1% this year and 1.5% in 2015, and policy makers have indicated that a few months of low inflation may not necessarily trigger further monetary-policy action.
Dutch central bank governor Klaas Knot said in a Bloomberg interview that annual consumer-price gains will probably stay below 1% until May or June. The ECB’s December projections foresee annual inflation rates of 1.1% this year and 1.3% in 2015.
German inflation
We have to look at it from a medium-term perspective and, so far, this is quite in line with our baseline scenario, Draghi said on 9 January after the governing council kept borrowing costs unchanged. We will act when we have reason to think that our medium-term assessment for inflation is changing for the worse.
German inflation unexpectedly held at 1.2% in January, with consumer prices dropping the most in a year when compared to the previous month, according to data published on Thursday. Economists had expected the rate to increase to 1.3%.
Another key to any action will be officials’ interpretation of the unwarranted tightening in money markets that Draghi said would be one reason to ease policy.
The overnight unsecured lending rate for banks was above the ECB’s benchmark rate for four days through 21 January and climbed as high as 0.359% on 20 January. It fell to 0.157% by 29 January.
Benchmark rate
With regard to money-market conditions and their potential impact on our monetary-policy stance, we are monitoring developments closely and are ready to consider all available instruments, Draghi said on 9 January.
Economists at Commerzbank AG and Barclays Plc changed their interest-rate call this month and now expect the benchmark rate to fall to 0.1% and the deposit rate, which is currently at zero, to minus 0.1% by March. Policy makers hold their next meeting on 6 February.
While a rate cut would be the best option to respond to rising market rates, inflation below 1% may not yet be a reason for concern, said Dirk Schumacher, an economist at Goldman Sachs Group Inc. in Frankfurt.
Current low inflation rates are by themselves not a sufficient trigger for an easing of the monetary policy stance, he wrote in a client note published on 28 January. Thus, at least for now, the governing council is willing to look through the month-on-month volatility. BLOOMBERG
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