Drop in eurozone inflation fuels rate-cut talk

Unexpected decline brings fears of def lation, even slower recovery

LONDON — The pressure on the European Central Bank to cut interest rates again ratcheted up on Friday after figures showed inflation unexpectedly falling further below its target.

Consumer price inflation in the 18-country eurozone fell to 0.7 per cent in the year to January from 0.8 per cent the previous month, the Eurostat agency said.

The decline was unexpected — the consensus for a rise to 0.9 per cent — and reinforced fears that the eurozone is about to suffer a Japanesestyle bout of deflation that would further hobble the stagnant recovery. Once prices start to fall, economies can become moribund as consumers delay purchases in the hope of getting bargains later and businesses postpone investment and innovations.

The ECB holds its monthly meeting Thursday and a growing number of economists think it may ease monetary policy soon in response to these deflation fears.

The ECB targets inflation at just below two per cent.

The U.S. Federal Reserve, by contrast, also monitors unemployment.

Some economists think the central bank’s Governing Council will reduce its main interest rate to 0.10 per cent from the current record low of 0.25 per cent. Cutting rates can help lift inflation by stimulating demand and by reducing the euro, which would make imports more expensive.

“The Governing Council needs more bad news on inflation like a hole in the head,” said Richard Barwell, economist at Royal Bank of Scotland, who predicted November’s interest rate reduction. “On balance we think a rate cut is the brave thing to do and the right thing to do and that is what we expect the Council to do.”

Other analysts reckon the ECB will hold off for a month at least, mainly because other economic indicators have been more upbeat of late.

Though the eurozone economy grew by a quarterly rate of only 0.1 per cent in the third quarter of 2013, recent surveys on confidence among businesses and consumers have suggested growth may be picking up even in those countries that have been bailed out, such as Portugal and Spain. Also, the drop in inflation was largely due to falling energy costs, which may free up money for cashstrapped households.

A separate Eurostat release showed unemployment in the eurozone fell by 129,000 in December to 19.01 million, though the overall unemployment rate was unchanged at 12 per cent.