Euro-Region Inflation Slowed in April as Oil Gains Weakened

European inflation slowed in April as energy costs increased at a weaker pace than a year ago.

The inflation rate in the 17-nation euro area fell to 2.6 percent from 2.7 percent in March, the European Union’s statistics office in Luxembourg said in an initial estimate today. Economists forecast consumer prices to rise 2.5 percent, the median of 37 estimates in a Bloomberg News survey showed.

European Central Bank President Mario Draghi softened his tone on the euro region’s inflation outlook on April 25, calling risks “broadly balanced.” Growth in loans to households and companies weakened in March, the ECB said today. With oil prices retreating and the region’s economic slump deepening, economists forecast the central bank would keep its benchmark interest rate at 1 percent when council members meet on May 3.

“Some of the decline is probably due to oil prices,” Peter Vanden Houte, an economist at ING Group in Brussels, said in an e-mailed note. “It looks as if pricing power among European companies is weakening again.” The ECB’s borrowing costs will probably “remain at the current low level at least until the end of 2013, and perhaps even longer.”

The euro was little changed after the report, trading at $1.3235 at 11:06 a.m. in Frankfurt. The Stoxx Europe 600 Index slipped 0.1 percent.

ECB Projections

Euro-region inflation may average 2.4 percent this year and 1.6 percent in 2013, the ECB said on March 8. The Frankfurt- based central bank, which will publish its latest economic projections in June, aims to keep annual gains in consumer prices just below 2 percent.

Crude-oil prices have declined about 1.7 percent in the past two months, leaving consumers with more money to spend as the region’s debt crisis undermines confidence and hiring. European economic sentiment dropped more than economists forecast in April, partly as households grew more pessimistic.

With the region’s economic slump deepening and consumers reluctant to boost spending, companies have been forced to lower costs to protect earnings. Unemployment probably rose to 10.9 percent in March from 10.8 percent in the previous month, a Bloomberg survey shows. The European Union’s statistics office will release the report on May 2.

‘Massive Liquidity’

The ECB has injected more than 1 trillion euros ($1.3 trillion) into the banking system to fight the crisis. That may have increased council members’ reluctance to lower borrowing costs further after two cuts in the fourth quarter, said Howard Archer, chief European economist at IHS Global Insight in London, citing concern about “the longer-term inflationary impact of the massive liquidity.”

Still, ECB Vice President Vitor Constancio said on April 25 that the central bank’s assessment of inflation risks has changed as the economy weakens.

“Because we see everywhere economic growth is slowing down a little bit, so we have a different perspective now on the risk for inflation coming from oil and commodities,” he said. “We believe that oil prices will not continue to go up.”

The statistics office is scheduled to release a breakdown of April consumer prices next month. Euro-area core inflation, which excludes volatile costs such as energy, quickened to 1.6 percent in March from 1.5 percent in the previous month.

To contact the reporter on this story: Simone Meier in Zurich at smeier@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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