Euro zone inflation staged a surprise rebound in February, an estimate showed on Monday, but economists said it would soon fall again and the case for a deep European Central Bank interest rate cut on Thursday was intact.
European Union statistics office Eurostat said consumer prices in the 16 countries using the euro rose 1.2 per cent year-on-year in February, compared with 1.1 per cent in the January and 1.6 per cent in December.
"The underlying trend remains weak and we expect inflation to post new lows in March, helped by favourable base effects," said Luigi Speranza, economist at BNP Paribas.
"Between March and July 2008, energy prices rose by more than 11 percent, reflecting the escalation in oil prices. The reversal of this effect will help drive headline inflation into negative territory as early as in June this year," he said.
This meant that the ECB would still cut interest rates by 50 basis points to 1.5 per cent on Thursday, economists said, forecasting ECB rates at 1 per cent or even less by mid-year.
"Inflation is still on track to turn negative over the summer months and remain well below 2 per cent throughout 2010, suggesting that the ECB will cut rates to zero, or thereabouts later this year," said Ben May, economist at Capital Economics.
The ECB wants to keep inflation below, but close to 2 per cent and has made it clear it did not want price growth to slow too much below its target, even if it did not see a risk of deflation.
It has cut borrowing costs by a total of 225 basis points to 2 per cent since October as inflation decelarated sharply from a July peak of 4 per cent along with economic activity and plunging oil prices.
The Eurostat estimate does contain monthly figures or any breakdowns, which will only come on March 16th. But last week, inflation in the biggest economy Germany quickened to 1 per cent in February from 0.9 per cent in January.
"It is likely that negative energy and food effects were offset by a modest rise in core inflation from 1.6 per cent to around 1.7 per cent," said May.
"But with the euro-zone economy set to contract by around 3 per cent this year and input prices continuing to plunge, a further slowdown in core inflation looks inevitable," he said.
Reuters