Inflation pressures on Eurozone starts to wane

Brussels: Inflation pressures in the Eurozone are easing, data showed on Friday, giving governments and central bankers a touch more leeway for stimulus as the region’s leaders seek to shift their focus to reviving economic growth.

Modest wage growth and a cooling of food price pressures drove annual Eurozone inflation down to 1.8 per cent in February, its lowest level since mid-2010, the EU’s statistics office said on Friday.

The figure, which confirmed Eurostat’s flash estimate from March 1 and was as expected by economists polled by Reuters, is around the European Central Bank’s target of below but close to two per cent.

Combined with only very modest wage increases in the fourth quarter of 2012, the data highlights the weakness of the Eurozone economy and will fuel expectations in some quarters that the ECB could cut interest rates this year.

“With inflation set to undershoot the ECB’s objective, an interest rate cut appears to be largely constrained by the prospect of an economic recovery in the second half of this year,” Citigroup said in a research note on Friday.

But with commercial bank lending in the Eurozone still subdued despite base rates being at a record low of 0.75 per cent, others are sceptical about the impact of another cut.

Three quarters of economists expect the ECB to leave rates unchanged for the rest of the year, according to a Reuters poll published on Wednesday.

Already in recession in 2012, the Eurozone economy is expected to shrink 0.3 per cent this year as households and businesses struggle with the fallout of the bloc’s public debt crisis and government spending cuts.

Thousands of protesters called on EU leaders, whose two-day summit in Brussels is due to end on Friday, to put an end to the austerity blamed for record unemployment in parts of Europe.

“Market pressure on European governments has been replaced by people pressure as a result of austerity and reform fatigue,” said Barclays economist Philippe Gudin.

Growth and Austerity

The ECB’s role is important because EU leaders are trying to find ways of reviving economic growth while budget discipline remains part of their strategy to overcome the bloc’s debt crisis.

“There are no easy answers,” European Council President Herman Van Rompuy, who chairs the summit, told a news conference on Thursday night. “The good progress towards structurally balanced budgets must continue,” he said.

France and Italy did win support for a slightly more growth-friendly interpretation of European Union budget rules at the summit after French President Francois Hollande challenged German-driven fiscal austerity.

One silver lining in the Mediterranean region is that only very modest wage increases are helping to improve competitiveness after a decade-long boom fuelled by easy credit pushed the Eurozone into a false sense of economic wellbeing.

Hourly labour costs in the Eurozone rose 1.3 per cent overall in the last three months of 2012, compared to the same period in 2011. Wages per hour grew by 1.4 per cent.

Those rises were less than half the level of increases in early 2009, at a time when Europeans were giving themselves generous pay hikes, pushing up the cost of labour by 12 per cent between 2001 and 2011.

In Spain, hourly labour costs fell 3.4 per cent, but Germany recorded a 2.9 per cent increase, which bodes well because wealthier consumers in Europe’s largest economy could buy more of their neighbours’ products.

- Reuters