Euro zone inflation falls more than expected

CONSUMER PRICES in the euro zone fell more than expected in December, the start of a retreat from a November peak that should give the European Central Bank more room to cut interest rates as the economy heads for recession.

Separately, German business confidence began the new year with a bounce, according to new data.

Inflation in the 17 countries sharing the euro was 2.7 per cent in December on an annual basis, revised down from an earlier estimate of 2.8 per cent for the month, the European Union’s statistics office, Eurostat, said.

“The pressure is abating although the risks from energy are still there,” said Barclay’s Capital economist Fabio Fois. “We think the ECB could bring rates as low as 0.5 per cent in March.”

Data from Germany’s Zew economic institute showed its economic sentiment indicator jumped by 32.2 points to its highest level since last July. The institute said the surprise rise boded well for Europe’s largest economy in the first half of 2012.

“This suggests that, within the next six months, German economic activity is likely to stabilise instead of deteriorating further,” said a statement from Zew, which bases its index on monthly interviews with executives and academics.

“Contrary to oft-expressed fears of a recession, the assessment of the financial market experts gives reason for cautious optimism that Germany will only experience a dent in economic activity.”

After a drop in German growth from 3 per cent to about 1 per cent this year, Zew suggested the economy would pick up speed again and return to 3 per cent growth in 2013 – once the debt crisis does not stunt progress.

Several leading analysts shared the institute’s view that the data indicated the worst of the euro zone crisis was over for Germany.

“In addition to probably the soundest economic fundamentals of all big euro zone countries, the German economy should actually again benefit from the euro zone debt crisis in the coming weeks and months,” said Carsten Brzeski, an analyst with ING bank, citing German gains from the euro’s low foreign exchange rate.

Final data from Eurostat yesterday showed the euro zone inflation estimate was revised slightly down from the flash estimate of 2.8 per cent. On a monthly basis, consumer prices rose 0.3 per cent in the final month of 2012.

In annual terms, EU inflation was down to 3 per cent in December from 3.4 per cent in November.

The slowing inflation rate means the ECB is unlikely to rush the next cut in its key interest rate, according to some observers.

Instead, it is likely to observe the impact of two recent rate cuts and three-year low-interest loans to banks.

“The ECB’s super-tender is showing effects and the economic outlook has improved somewhat,” said Andreas Scheürle, economist with Frankfurt’s DekaBank.

“But the region’s debt crisis isn’t over and there’s a lot of relapse potential ahead. We’re observing a stabilisation. It’s too early to be more optimistic.” – (Additional reporting: Reuters)