ECB Mulls Further Cuts as Inflation Abates

Inflationary pressures are abating in the euro zone, where consumer prices fell more than expected in December, leaving the door open for the European Central Bank to cut interest rates.

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Inflation in the 17-nation euro zone was 2.7 percent in December on an annual basis, revised down from an earlier estimate of 2.8 percent, according to the European Union’s statistics office, Eurostat.

An economist at Barclay’s capital, Fabio Fois said, “We think the ECB could bring rates as low as 0.5 percent in March.”

The central bank has already made two 25 basis points cuts since Mario Draghi took over as president in November. Many economists expect the new central bank chief will take rates below 1 percent for the first time ever in the coming months.

But Governing Council member Ewald Nowotny recently hinted that the bank is in no hurry to move again. “We are all agreed that now the point is to allow these measures to take full effect. Only then will we take further decisions,” he told the Wall Street Journal‘s German website.

Stripping out volatile energy prices, inflation was 1.9 percent in December. Without energy and food, it was just 1.6 percent, which sits better with the ECB’s 2 percent target judged to be the right price for stability and a healthy economy.

However, though inflation sits at healthy levels, the euro-zone economy is far from healthy. The 17-nation bloc’s gross domestic product likely shrank in the fourth quarter of 2011, and is expected to do so again in the first quarter of 2012.

Unemployment continues to rise across the region, while demand for goods is declining, putting pressure on retailers to reduce prices, which has offset high oil prices driven up by concerns about a supply disruption in Iran.

In the euro zone, fuels for transport, heating oil, gas, and electricity had the biggest impact on inflation in December. Energy inflation was 9.7 percent last month, compared to December 2010.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

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