Hopes raised of further ECB rate cuts

Hopes raised of further ECB rate cuts

Hopes have been raised that the European Central Bank could be set to further reduce its rates after inflation in the euro zone fell further than expected in December.

Figures released today by the EU’s statistics office Eurostat show that inflation in the 17 euro zone countries was 2.7% in December. This was revised down from an earlier estimate of 2.8%.

The lowest annual inflation rates were observed in Sweden (0.4%), Malta (1.3%) and Bulgaria (2.0%), while the highest were in Slovakia (4.5%), Poland (4.5%) and Cyprus (4.2%).

Eurostat says lower energy prices are responsible for much of the drop in inflation.

Although inflation has been running above the European Central Bank’s target of just below 2%, the bank cut interest rates in both November and December, taking the benchmark rate back to the joint record low of 1%.

The bank expects inflation to drop back further in the coming months as high unemployment keeps a lid on wage demands and last year’s spike in energy and commodity prices drop out of the annual comparison.

Further cuts in the main euro interest rate are widely predicted over the coming months as the euro zone economy appears to be heading back into recession in the face of a debt crisis that’s dented economic confidence.

Gustavo Bagattini, European economist at RBC Capital Markets, said:  “We believe that, with the ECB feeling (relatively) at ease about inflation prospects over the medium term, it will cut the rate down to 0.5%.”

A further ECB rate cut has been predicted for either February or March. Tracker mortgage holders can save €30 a month on the cost of a €200,000 mortgage for every 0.25% cut in the main rate.

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