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EU inflation drops to 1.8pc

Brussels, March 16, 2013

Inflation pressures in the euro zone are easing, data showed yesterday, giving governments and central bankers a touch more leeway for stimulus as the region's leaders seek to shift their focus to reviving economic growth.

Modest wage growth and a cooling of food price pressures drove annual euro zone inflation down to 1.8 per cent in February, its lowest level since mid-2010, the EU's statistics office said.

The figure, which confirmed Eurostat's flash estimate from March 1 and was as expected by economists, is around the European Central Bank's target of below but close to 2 per cent.

Combined with only very modest wage increases in the fourth quarter of 2012, the data highlights the weakness of the euro zone economy and will fuel expectations in some quarters that the ECB could cut interest rates this year.

"With inflation set to undershoot the ECB's objective, an interest rate cut appears to be largely constrained by the prospect of an economic recovery in the second half of this year," Citigroup said in a research note.

But with commercial bank lending in the euro zone still subdued despite base rates being at a record low of 0.75 per cent, others are sceptical about the impact of another cut.

Three quarters of economists expect the ECB to leave rates unchanged for the rest of the year, according to a poll published on Wednesday.

Already in recession in 2012, the euro zone economy is expected to shrink 0.3 per cent this year as households and businesses struggle with the fallout of the bloc's public debt crisis and government spending cuts.

Thousands of protesters called on EU leaders to put an end to the austerity blamed for record unemployment in parts of Europe.

One silver lining in the Mediterranean region is that only very modest wage increases are helping to improve competitiveness after a decade-long boom fuelled by easy credit pushed the euro zone into a false sense of economic wellbeing.

Hourly labour costs in the euro zone rose 1.3 per cent overall in the last three months of 2012, compared to the same period in 2011. Wages per hour grew by 1.4 per cent.

Those rises were less than half the level of increases in early 2009, at a time when Europeans were giving themselves generous pay hikes, pushing up the cost of labour by 12 percent between 2001 and 2011.

In Spain, hourly labour costs fell 3.4 per cent, but Germany recorded a 2.9 per cent increase, which bodes well because wealthier consumers in Europe's largest economy could buy more of their neighbours' products.-Reuters




Tags: inflation | Euro zone |

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