Deep rate cut expected as eurozone inflation falls below 2% ECB target

EUROZONE inflation plunged more than expected to a 26-month low in December as the economy slowed sharply, knocking back the euro on expectations of a deep ECB rate cut next week.

The Irish Mortgage Corporation said this represents good news for Irish consumers, particularly those paying a variable rate mortgage.

“It’s looking increasingly likely that the European Central Bank governing council will move to reduce the base rate from its current level of 2.5% sooner rather than later,” said director of the Irish Mortgage Corporation, Frank Conway.

He said mortgage holders may be paying up to €5,000 less per year than they were last summer.

The next scheduled meeting of the ECB Governing Council is on Thursday of next week.

The European Union’s statistics office Eurostat said inflation in the 15 countries using the euro in December was down to 1.6% year-on-year from 2.1% in November and below the ECB target of under 2%.

Economists polled by Reuters had expected a decline to 1.8%, and the lower number added to the case for a cut in interest rates to keep price growth from diving beneath the ECB’s target.

The euro fell against the dollar to $1.3347 from $1.3440 in response to the data.

ECB rate cut expectations were also boosted by data showing that the eurozone private sector services economy shrank sharply in December and firms cut more jobs than expected, pointing to a deep recession lasting for a good part of 2009.

“It makes it even more likely for the ECB to cut interest rates further in the next few months, starting in January and going to 1.5% in March,” said Holger Schmieding, co-head of Europe economics at Bank of America.