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Euro-Area 1.2% Inflation Adds Pressure for ECB Rate Cut: Economy

Euro-Area Inflation at 1.2% Increases Pressure for ECB Rate Cut
Prices of food, alcohol and tobacco rose 2.9 percent, compared with 2.7 percent in March, while the cost of services increased 1.1 percent.Photographer: David Ramos/Getty Images

April 30 (Bloomberg) -- Euro-area inflation at a three-year low and record unemployment increased pressure on the European Central Bank to cut interest rates later this week to spur lending and growth.

The annual inflation rate dipped to 1.2 percent in April, the lowest since February 2010, from 1.7 percent a month earlier, the European Union’s statistics office in Luxembourg said today. The rate has been below the ECB’s 2 percent ceiling since February. The March jobless rate advanced to 12.1 percent, the highest since the data series began in 1995.

The ECB’s Governing Council will cut its benchmark rate to a record low 0.50 percent on May 2 from 0.75 percent, according to the median of 70 economists’ estimates in a Bloomberg News survey. The Frankfurt-based central bank sees inflation at 1.6 percent this year and 1.3 percent in 2014.

“If it weren’t for the ECB’s usual reluctance to make large changes, there would be a strong case to cut by 50 basis points, and I think the likelihood is perhaps higher than the market expects,” Frederik Ducrozet, an economist at Credit Agricole SA, said by telephone from Paris. “It’s probably around 20 percent, because with inflation that low it’s really the best time to do such things and maximize the impact on the market.”

Debt Crisis

Europe’s sovereign-debt crisis flared up again in March after euro-area finance ministers decided to impose losses on depositors at Cypriot banks in exchange for a 10 billion-euro aid package. The euro-zone economy has contracted for five straight quarters and probably shrank 0.1 percent in the first three months, another Bloomberg survey shows.

ECB Governing Council member Jens Weidmann, who heads Germany’s Bundesbank, said on April 19 that the central bank would only lower borrowing costs if economic data worsened. ECB President Mario Draghi said the same day the economic situation in the 17-nation currency bloc hadn’t improved since the last rate meeting on April 4.

Nomura International Plc, UBS AG and Royal Bank of Scotland Group Plc are among banks predicting an ECB rate cut. While ECB Executive Board member Joerg Asmussen said on April 20 that a rate cut was possible, he noted six days later that there are risks to keeping rates low for a long time.

“Several ECB officials are worried that inflation might get stuck at very low levels, well below its price stability goal,” said Nick Kounis, an economist at ABN Amro Bank NV in Amsterdam. “The ECB has a symmetric inflation objective, and that means if inflation looks like it’s trending too low, that’s as important as if it’s above 2 percent and trending too high.”

Volatile Costs

Consumer price growth was slowed in April primarily by energy costs, which decreased 0.4 percent after a 1.7 percent gain a month earlier, today’s report showed. The inflation rate excluding volatile costs such as energy, food and alcohol fell to 1 percent from 1.5 percent.

Soaring unemployment also “cannot be ignored, because this is the biggest fragmentation that is happening in Europe,” ECB Vice President Vitor Constancio said on April 25. “It’s even worse in what regards youth unemployment.”

Today’s report showed that 19.2 million people were jobless in the euro area in March, up 62,000 from the previous month. Youth unemployment was at 24 percent. The jobless rate in Germany, Europe’s largest economy, held at 5.4 percent.

Asian Output

In Spain, the jobless number is the highest since at least 1976, the year after dictator Francisco Franco’s death heralded Spain’s transition to democracy. The rate rose to 26.7 percent in March, with youth unemployment at 55.9 percent.

The economic gloom spread from Europe to Asia, where Japanese and South Korean industrial output was less than estimated in March and Taiwan’s first-quarter growth was half the forecast pace as weakness in global demand limited recoveries in Asian economies.

In the U.S., the dollar touched the lowest in more than a week versus the euro before the Federal Reserve begins a two-day meeting amid bets it will maintain its quantitative easing bond purchases for the foreseeable future.

To contact the reporters on this story: Marcus Bensasson in Athens at mbensasson@bloomberg.net; Angeline Benoit in Madrid at abenoit4@bloomberg.net

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

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