EU - ECONOMY
Euro zone inflation hits 3%
Friday, November 30, 2007
Estimates published by the European Union's statistics office show that year-on-year inflation in the Euro zone reached 3% in November. This is the strongest rise in consumer prices in the last 18 months.
Friday, November 30, 2007
By Reuters
Euro zone inflation jumped to its highest in six and a half years in November and inflation expectations rose, but economic growth was set to slow, highlighting the European Central Bank's rate dilemma.
The European Union's statistics office estimated that consumer prices in the 13 countries using the euro rose 3.0 percent year-on-year, up from 2.6 percent in October. This is the highest since May 2001, when inflation hit a record 3.1 percent. Economists had expected 2.9 percent for November.
The ECB, which meets on interest rates next Thursday, wants to keep inflation just below 2 percent over the medium term but has been in a wait-and-see mode since September to assess the full impact of the global credit crunch on the economy.
The ECB said it would take extra steps to ease banks' worries about funding around the end of the year as a scramble for cash pushed the cost of three month euro money to fresh 6.5 year highs above 4.8 percent, well over the ECB's 4.0 percent policy rate.
Economists said the credit squeeze also showed in the European Commission's monthly sentiment survey for November
which showed another decline in confidence, led by consumers and the services sector.
"Our gut feeling is that GDP has just entered a path of moderately below-trend growth, which should last at least until spring 2008," said Marco Valli, economist at Unicredit.
"Given that financial markets remain unsettled and the currency has the potential to appreciate further, risks to our view are on the downside," he said.
The slowdown will follow a rebound in growth in the third quarter, which Eurostat confirmed on Friday at 0.7 percent quarter-on-quarter and 2.7 percent year-on-year against 0.3 percent quarterly growth in the previous three months.
It was driven mainly by household consumption, investment and inventory growth, which offset a negative contribution from net foreign trade.
But household consumption is likely to slow. Retail sales in Germany, the euro zone's biggest economy, confirmed on Friday consumers were becoming more gloomy by falling by a much deeper than expected 3.3 percent in October against September.
"It all looks like a recipe for the ECB to sit on its hands for a sustained period," said Dominic Bryant of BNP Paribas.
DEEP IMPASSE
Eurostat will not give monthly data and a detailed breakdown of the inflation estimate until Dec. 14, but economists said the jump was due to an acceleration in food and energy prices, with high inflation in Germany and Spain.
"Inflation risks are rising in the short term, while growth momentum is slowing in the longer term. It leaves rate policy in a deep impasse, with rates likely to stay unchanged for quite a few months," said David Brown, chief European economist at Bear Stearns International.
The Commission survey showed that inflation expectations among businesses and consumers rose in November and were well above long-term averages.
"Inflation will no doubt remain well above 2 percent over the next few months," said Christoph Weil, economist at Commerzbank. "The base effect resulting from oil prices will only disappear next spring. We see no serious threats to euro zone inflation in the medium term, though."
"Once inflation starts to retreat and the economy shifts down a gear, the ECB will be forced to put interest rate hikes on the back burner for the time being. We still expect a first rate cut at the end of next year," Weil said.
The Commission survey showed confidence in the euro zone falling more than expected to 104.8 points from an upwardly revised 106.0 in October, while economists had expected 105.0.
The European Union's statistics office estimated that consumer prices in the 13 countries using the euro rose 3.0 percent year-on-year, up from 2.6 percent in October. This is the highest since May 2001, when inflation hit a record 3.1 percent. Economists had expected 2.9 percent for November.
The ECB, which meets on interest rates next Thursday, wants to keep inflation just below 2 percent over the medium term but has been in a wait-and-see mode since September to assess the full impact of the global credit crunch on the economy.
The ECB said it would take extra steps to ease banks' worries about funding around the end of the year as a scramble for cash pushed the cost of three month euro money to fresh 6.5 year highs above 4.8 percent, well over the ECB's 4.0 percent policy rate.
Economists said the credit squeeze also showed in the European Commission's monthly sentiment survey for November
which showed another decline in confidence, led by consumers and the services sector.
"Our gut feeling is that GDP has just entered a path of moderately below-trend growth, which should last at least until spring 2008," said Marco Valli, economist at Unicredit.
"Given that financial markets remain unsettled and the currency has the potential to appreciate further, risks to our view are on the downside," he said.
The slowdown will follow a rebound in growth in the third quarter, which Eurostat confirmed on Friday at 0.7 percent quarter-on-quarter and 2.7 percent year-on-year against 0.3 percent quarterly growth in the previous three months.
It was driven mainly by household consumption, investment and inventory growth, which offset a negative contribution from net foreign trade.
But household consumption is likely to slow. Retail sales in Germany, the euro zone's biggest economy, confirmed on Friday consumers were becoming more gloomy by falling by a much deeper than expected 3.3 percent in October against September.
"It all looks like a recipe for the ECB to sit on its hands for a sustained period," said Dominic Bryant of BNP Paribas.
DEEP IMPASSE
Eurostat will not give monthly data and a detailed breakdown of the inflation estimate until Dec. 14, but economists said the jump was due to an acceleration in food and energy prices, with high inflation in Germany and Spain.
"Inflation risks are rising in the short term, while growth momentum is slowing in the longer term. It leaves rate policy in a deep impasse, with rates likely to stay unchanged for quite a few months," said David Brown, chief European economist at Bear Stearns International.
The Commission survey showed that inflation expectations among businesses and consumers rose in November and were well above long-term averages.
"Inflation will no doubt remain well above 2 percent over the next few months," said Christoph Weil, economist at Commerzbank. "The base effect resulting from oil prices will only disappear next spring. We see no serious threats to euro zone inflation in the medium term, though."
"Once inflation starts to retreat and the economy shifts down a gear, the ECB will be forced to put interest rate hikes on the back burner for the time being. We still expect a first rate cut at the end of next year," Weil said.
The Commission survey showed confidence in the euro zone falling more than expected to 104.8 points from an upwardly revised 106.0 in October, while economists had expected 105.0.
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