BRUSSELS (Reuters) - Consumer prices in the euro zone fell more than previously expected in December, the start of a retreat from a November peak that should give the European Central Bank more room to cut interest rates as the economy heads for recession.
Inflation in the 17 countries sharing the euro was 2.7 percent in December on an annual basis, revised down from an earlier estimate of 2.8 percent for the month, the European Union’s statistics office Eurostat said.
“The pressure is abating although the risks from energy are still there,” said Fabio Fois, an economist at Barclay’s Capital. “We think the ECB could bring rates as low as 0.5 percent in March,” he said.
The bank made two 25 basis points cuts after Mario Draghi took over as president in November before holding fire this month.
Many economists expect it to take rates below 1 percent for the first time ever in the coming months but comments by Governing Council member Ewald Nowotny published on Tuesday hinted that the bank was in no hurry to move again.
“We are all agreed that now the point is to allow these measures to take full effect. Only then will we take further decisions,” he told the Wall Street Journal’s German website.
“For the ECB ‘We never precommit’ always applies, but there are no plans whatsoever at the moment.”
Reuters’ latest polling of some 66 economists before the ECB met earlier this month suggested the bank will cut interest rates to a new record low of 0.75 percent in February or March.
Economists had expected euro zone inflation to remain at 2.8 percent in December.
Stripping out volatile energy prices, the main driver behind a 3 percent peak in the headline number in September, October and November, inflation was 1.9 percent.
Without energy and food, it was 1.6 percent.
That sits better with the ECB’s target of below, but close to 2 percent, which the Frankfurt-based bank judges to be right for price stability and a healthy economy.
The euro zone’s economy, however, is anything but. The bloc’s gross domestic product probably contracted in the fourth quarter of 2011 and is expected to do so again in the first quarter of 2012 - showing it has fallen into a recession.
The weakening economy and rising unemployment across the bloc are cutting demand for goods and with it pressuring retailers to reduce prices. That has offset continuing high prices for crude oil globally due to concerns about a supply disruption in Iran.
Oil futures rose on Monday after Saudi Arabia told its Gulf Arab neighbors not to make up any shortfall caused by an embargo on Iranian crude oil exports.
In the euro zone in December, fuels for transport, heating oil, gas and electricity had the biggest impact on inflation in December. Energy inflation was a massive 9.7 percent in the month, compared to December 2010, Eurostat said.
Reporting by Robin Emmott; editing by Patrick Graham