Euro-Area Inflation Slows, Giving ECB Room to Cut Rates: Economy

European Inflation Slowed Giving ECB Room on Rates
A customer browses for L'Oreal products in a supermarket in Aulnay, France. Photographer: Fabrice Dimier/Bloomberg

Euro-region inflation slowed for the first time in five months in December, giving the European Central Bank room to lower borrowing costs further as the economy edges toward a recession.

The inflation rate in the 17-nation euro area fell to 2.8 percent from 3 percent in November, the European Union’s statistics office in Luxembourg said in an initial estimate today. Euro-area services and manufacturing output contracted less than initially estimated last month and French consumer spending unexpectedly declined in November from October, separate reports showed.

Europe’s economy is showing increasing signs of a slowdown as governments struggle to contain the region’s debt crisis, adding pressure on the ECB to lower the benchmark interest rate from the current 1 percent, which matches a record low. Economists at IHS Global Insight and ABN Amro forecast the central bank will cut borrowing costs as low as 0.5 percent to fight a recession.

“Euro-zone inflation has now passed its peak and is likely to fall further in the coming months to levels clearly below 2 percent in the second half of this year,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. “The favorable medium-term inflation outlook is a green light for further ECB rate cuts over the coming months.”

The euro traded at $1.2981 at 12:45 p.m. in Frankfurt, down 0.3 percent on the day. The Stoxx Europe 600 Index declined 0.5 percent. U.S. Treasury 10-year securities fell for a second day, pushing yields up the most in a week.

‘Downside Pressure’

In the U.S. economy, the world’s largest, factory orders probably rose 2 percent in November from the previous month, when they fell 0.4 percent, according to a Bloomberg survey. The Commerce Department will publish the report at 10 a.m. New York time today.

Signs of a strengthening American economy contrast with indications of a global slowdown. China’s home prices fell for a fourth month in December, SouFun Holdings Ltd., the nation’s largest real-estate website owner, said today. Chinese Premier Wen Jiabao said yesterday that there is “downside pressure” on the economy and also cited “problems of weakening external demand and rising costs for companies.”

In the euro region, inflation may average 2 percent this year and 1.5 percent in 2013, the ECB forecast on Dec. 8. In 2011, consumer prices probably increased 2.7 percent on average, it estimated. The economy may expand just 0.3 percent this year after growing 1.6 percent in 2011, according to the ECB.

Waning Confidence

While crude-oil prices have increased 11 percent over the past year, companies may find it difficult to pass on higher costs as governments toughen austerity measures and the economy cools. Euro-area unemployment rose to 10.3 percent in October, the highest in more than a decade, and consumer confidence fell to the lowest in more than two years last month.

“Europe is on the brink of a recession,” Luxembourg Prime Minister Jean-Claude Juncker said in Luxembourg today. “One has to react adequately to it.”

Euro-region economic confidence probably dropped to the lowest in more than two years in December, according to a Bloomberg survey. The European Commission will release the report measuring confidence of households, builders and manufacturers on Jan. 6.

Consumer Spending

L’Oreal SA, the world’s largest cosmetics maker, said on Nov. 7 that Portugal, Italy, Greece and Spain held back growth in the third quarter, leaving the Paris-based company “cautious” for the rest of 2011. The situation remains “difficult in southern Europe,” Chief Executive Officer Jean-Paul Agon said in a statement.

In France, consumer spending dropped 0.1 percent in November from the previous month, when it rose 0.1 percent, national statistics office Insee in Paris said today. Euro-region services industries contracted for a fourth month in December, a separate report by Markit Economics showed.

While the ECB was forced to reverse last year’s two rate increases, expand provisions of unlimited cash to banks and widen the pool of collateral to secure the funds, it has rejected stepping up purchases of government bonds.

ECB council members will hold their next rate meeting on Jan. 12 in Frankfurt. President Mario Draghi said on Dec. 8 that, while risks to the price outlook are “broadly balanced,” inflation will remain above 2 percent for “several months to come before declining” below the ceiling.

Overall Inflation

“With energy price inflation set to tumble further over the next few months and the recession expected to push core inflation lower, overall inflation should drop below 2 percent around the middle of this year,” said Martin van Vliet, an economist at ING Group in Amsterdam. “There’s a decent chance of the ECB delivering at least one additional 25 basis point cut over the next few months.”

The statistics office will release a breakdown of December consumer prices on Jan. 17. Euro-area core inflation, which excludes volatile costs such as energy, held at 1.6 percent in November from the previous month.

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