Euro zone consumer prices fell for the third month running year-on-year in August and the data, coupled with falling inflation expectations, looks set to keep ECB rates steady despite a nascent economic recovery.
Prices in the 16-country area fell 0.2 per cent this month, European Union statistics office Eurostat estimated today, after a 0.7 per cent drop in July and a 0.1 per cent easing in June.
Forecasts from economists polled by Reuters had centred on a 0.3 per cent fall in August, but some had forecast a 0.2 per cent dip after stronger-than-expected German inflation data last week.
"Despite the emerging strong growth in the second half of 2009, the ECB will not hike rates in the current year," said Christoph Weil, economist at Commerzbank.
With survey and hard data pointing to the euro zone emerging from recession in the third quarter, markets are speculating about when the European Central Bank might start tightening policy again after cutting borrowing costs to 1 per cent earlier this year.
"With the inflation rate set to remain dampened for the foreseeable future and the credit downturn in full swing, we see a strong case for a steady refi rate throughout 2010," said Tullia Bucco, economist at Unicredit.
The ECB wants inflation to be just below 2 per cent but Commerzbank's Weil expects the rate of consumer price growth could rebound to 1 per cent at the end of the year.
The bank meets on interest rates on Thursday, when the market expects no change to its main refinancing rate.
A detailed breakdown of the estimate and month-on-month data will be available on September 16th. The fall in prices is likely to be mainly due to cheaper oil, the cost of which has roughly halved since August 2008.
A monthly consumer survey by the European Commission showed that inflation expectations among households set a new record low in negative territory in August for the fifth month in a row.
Reuters