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ECB faces rates dilemma as inflation soars

Brussels, October 1, 2011

Inflation soared unexpectedly across the debt-laden eurozone in September, the EU said, creating a dilemma for European Central Bank (ECB) chief Jean-Claude Trichet who chairs his final policy meeting next week.

After Brussels revealed a big leap to three per cent, from 2.5 per cent in August, analysts said the departing ECB president faces a difficult call on whether to reduce interest rates to face weak economic times come Thursday's Frankfurt talks.

'The much larger-than-expected jump in eurozone consumer price inflation to a 35-month high of 3 per cent in September reinforces suspicion that an ECB move as soon as next Thursday is unlikely,' said IHS Global Insight analyst Howard Archer.

Non-euro inflation is also running high. The Bank of England, expected to launch a new round of stimulus under 'quantitative easing,' or printing money to bolster a slowing economy, has forecast 5pc across Britain for later this year.

London-based Archer believes the ECB, whose inflation target is carved in stone at 'below or close' to 2 per cent, will cut interest rates from 1.5 to 1.25 per cent before the end of the year.

However, he now reckons that Trichet's successor, Italy's Mario Draghi, will be the one left with the tougher call eventually.

'One complication surrounding any ECB move in November is that it will be Mario Draghi's first meeting as ECB president and he may be reluctant to see interest rates cut straight away in his tenure,' Archer said.

He suggested that 'Trichet could indicate that an ECB interest rate cut is very possible in November if economic data fail to pick up, which would put pressure on the Italian to act depending on wider developments.'

An increase in eurozone inflation was expected in line with Germany's announcement of a spike to 2.8 per cent, but the size of the jump was still a surprise two weeks after the European Commission said inflation 'seems to have peaked in the second quarter of 2011'.

In the EU executive's autumn forecast, economic affairs commissioner Olli Rehn presented findings tipping '2.5 per cent for the year as a whole, and remaining above 2 per cent until the end of 2011.'

Paris-based Clemente De Lucia of BNP Paribas focused on the devil in the detail, which he said suggested a 'benign' pattern ahead.

He said that available data at the national level, ahead of the release of detailed eurozone analysis by Eurostat in mid-October, did show inflation pushing up in the biggest euro economies.

De Lucia highlighted a significant rise in Italy, partly due to changes in statistical methods, and also a 'sharp rebound' in Germany for core clothing prices.

Nevertheless, he also maintained that 'the medium-term inflation profile is rather benign,' he added.-Reuters




Tags: inflation | European Central Bank | Rates | dilemma |

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