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Inflation slumps, unemployment stagnates in Eurozone

Text by AFP

Latest update : 2008-10-31

Eurostat figures for September show inflation fell back to last January's level in the 15 countries using the euro. Unemployment remained stable at 7.5%. The data may encourage the ECB to cut its interest rates.

Inflation in the 15 nations using the euro pulled back in October to a nine-month low point of 3.2 percent as oil prices slumped, an estimate from the Eurostat data agency showed on Friday.
Economists said that inflation was likely to keep falling in the months ahead, increasing the scope for the European Central Bank (ECB) to cut interest rates in the face of sharply slowing economic activity.
The estimate, which compared with 3.6 percent in September, marked the third month running that consumer prices have fallen since hitting a record 4.0 percent in June and July on the back of all-time high oil prices.
Since reaching a peak July of nearly 150 dollars a barrel, oil prices have more than halved in the face of a deteriorating global economic outlook to about 64 dollars a barrel on Friday.
Although economists had forecast inflation to fall slightly further to 3.1 percent, October's drop nonetheless brought consumer prices a big step closer to the ECB's comfort zone of a rate close to but less than 2.0 percent.
"The door for aggressive ECB easing is wide open, starting with a 50 basis point (half a percentage point) cut already next week. Anything less would be disappointing," said economist Marco Valli at Italian bank Unicredit.
ECB president Jean-Claude Trichet said on Monday that another cut in interest rates was "possible" at the central bank's next rate-setting meeting on Thursday November 6.
In concert with other major central banks, the ECB already slashed its main lending rate by half a percentage point on October 8 to 3.75 percent in a bid ease tensions on shell-shocked money markets.
Also forecasting a half-percentage point rate cut next week, UBS economist Sunil Kapadia said that a series of subsequent decreases would bring the ECB's main rate to 2.0 percent by mid 2009 in the face of a severe economic slump.
"With the economy contracting for six quarters in a row on our new forecasts and inflation falling quickly to close to 1.0 percent next year, the conditions for quick and aggressive policy easing are in place," he said.
Bank of America economist Holger Schmieding said that with inflation to keep falling concerns would likely switch to deflation, when prices actually decline most often in the face of slumping demand.
"At current oil prices, inflation could trough just below 1.0 in June and July next year before trending up thereafter," he said.
"We would not be surprised if markets were to start discussing the risk of deflation soon although, in our view, any oil-driven decline in prices should be seen as a welcome economic stimulus rather than a threat," he added.

Date created : 2008-10-31