Euro zone inflation plunged in November and unemployment jumped more than expected, boosting chances the ECB will increase the size of its interest rate cuts next week to aid a rapidly shrinking economy.
Consumer price inflation in the 15-country euro area fell by 1.1 percentage points to 2.1 per cent this month, the Eurostat statistics office estimated today.
Market forecasts had centred on a decline to 2.3 per cent.
"There will be further decline in inflation, and inflation is likely to fall below 1 per cent in 2009, and it's not ruled out that the year-on-year rate may turn negative," said Juergen Michels, economist at Citigroup.
"That all gives the ECB ample room for rate cuts. We expect a cut by 75 or 100 basis points in December and further rate cuts next year. Our forecast is that the ECB rate will go down to 1 per cent or even lower by mid-2009," he said.
The European Central Bank wants inflation to be below, but close to, 2 per cent and has signalled it has "ample" room to cut rates on December 4th if inflation pressures subside.
It has so far cut rates twice by 50 basis points each time in October and November as the euro zone economy went into recession in the wake of the worst global financial market crisis since the 1930s.
Most economists expect a 50-basis-point rate cut to 2.75 per cent, but around a quarter of the forecasters see a deeper cut of 75-100 basis points.
No monthly data or a detailed breakdown was available with the Eurostat estimate, but economists said a sharp drop in oil prices was the main reason behind the fall in annual inflation.
Between October and November oil prices fell by more than €12 per barrel, which is likely to have reduced energy price inflation by around 10 per cent, BNP Paribas economist Clemente de Lucia said.
Economists noted the drop in euro zone price growth was likely to fuel concerns that the single currency area might see deflation next year, but said chances for that were still low.
"Even if inflation approaches zero in the course of 2009, we regard the risk of deflation as still very low," said Christoph Weil, economist at Commerzbank.
"We are still a long way from falling prices across the board in the euro zone. The market still expects rising prices. Judging by the 5-year forward-break-even inflation rate based on inflation-linked swap rates, a medium-term inflation rate of 2.25 per cent is expected," he said.
Reuters