Inflation in the Eurozone Nears Lowest Level in a Decade

Inflation in the Eurozone plummeted in January to its lowest level in nearly 10 years while unemployment rose, putting additional pressure on the European Central Bank (ECB) to cut interest rates again as price growth is already far below the target level, data released on Friday showed.

According to preliminary estimates from the European statistics office Eurostat, the annual inflation rate in 16 Eurozone countries fell to 1.1 percent in January, the lowest level recorded since July 1999. It was 1.6 percent in December 2008 and 2.1 percent in November last year. Eurostat’s estimate does not include monthly data or any detailed analysis, but analysts believe that such a sharp decline is the result of a steep drop in oil prices compared to the same month in 2008. Furthermore, unemployment in the Eurozone rose to eight percent in December last year, the highest level since November 2006 and above analysts’ expectations, after 7.9 percent in November last year.

"The inflation data definitely represents a shock, it is a significantly larger drop than expected, which only shows how strong the disinflationary pressures in Europe actually are and puts additional pressure on the ECB to continue easing monetary policy," comments Matthew Sharratt, an economist at Bank of America. The ECB wants to keep the interest rate below but near the two percent level, and several members of the bank’s monetary committee have already expressed concern and warned that inflation should not fall too far below the target level. However, they completely dismissed the existence of deflation risks. After cutting interest rates by a total of 2.25 percentage points since October, to the current two percent, the bank signaled readiness for a pause in February and consideration of further cuts only in March.

"Today’s data will likely make it harder for the ECB to decide next week, due to disinflation and a sharper than expected rise in unemployment. They likely find themselves cornered," says Sharratt. Some economists believe that this data increases the chances that the ECB will decide to cut interest rates in February, despite the announced pause. "Given the significantly sharper than expected drop in inflation in the Eurozone in January, there is certainly a real chance that the ECB will decide to cut interest rates next week," says Howard Archer, an economist at IHS Global Insight. Many economists predict that the ECB will lower Eurozone interest rates to around one percent by mid-year, when inflation is likely to be negative due to the sharp drop in oil prices. (H)