Analysts agree interest cuts in Eurozone are on the way

INTEREST rate cuts in the Eurozone are on the way next month most market analysts agree, but differ on whether the cut will be 0.25% or 0.5%.

Ulster Bank Financial markets economist, Niall Dunne said market watchers will spend most of their time in the coming week trying to interpret further comments from the European Central Bank (ECB) on the scale of a rate cut that is now almost universally expected on December 5, the day after the Budget.

“ECB council member Ernst Weltke added further to the comments of Issing and Duisenberg over the weekend, and really all the market is asking now is: how big will the rate cut be? In Ulster Bank’s dealing room, the consensus is for a 50bps or 0.50% cut. I’m not yet entirely convinced that it will be 0.50%, but it certainly will be 0.25%. The comments have been by, ECB standards, so explicit, to risk disappointing the market now would destroy any credibility the bank has left,” said Mr Dunne.

Inflation information yesterday will however cool interest rate cut speculation. Eurozone October consumer prices rose 2.3% from a year ago, higher than an early estimate of 2.2%, and posted a larger-than-expected monthly increase of 0.3%, European Union statistics office, Eurostat, said yesterday. The inflation rate was the highest since April 2002, and surpassed the European Central Bank’s self-imposed 2% ceiling for the third month running, Eurostat said.

The increase in headline inflation came as energy prices posted their first annual increase since September 2001, rising by 2.3%.

“The rise in energy prices was perhaps a bit larger than we expected but it (the upward revision to headline inflation) is due to a rounding effect and nothing special,” an official at the European Union statistics office said. A detailed breakdown showed core prices, which exclude volatile energy and unprocessed food costs, rose at an annual rate of 2.4% compared with 2.5% in September. The latest data matches the December 2001 low for core inflation.

The inflation report comes at a time when financial markets are looking for a reduction in Eurozone interest rates and is unlikely to douse rate cut talk given the ECB said last week a sluggish economy and a stronger euro should dampen inflation in the medium term.

Also, the European Commission has forecast that the Eurozone inflation rate will fall below the ECB's ceiling in the first half of 2003.

The Eurostat data showed that the Eurozone’s inflation rate averaged 2.2% percent over the past 12 months.

National inflation rates ranged between Ireland’s high of 4.4% and 1.3%, as reported by Germany, Europe's biggest economy, and Belgium.