Doubt over ECB interest rate cut as consumer price inflation hits 3%

EUROZONE consumer price inflation jumped unexpectedly to 3% in September, its highest level in almost three years, heaping doubt on bets that the European Central Bank will cut interest rates next week.

In an estimate from the EU’s statistics agency Eurostat, the inflation figure for the 17 countries that share the euro increased from the 2.5% in August to its highest since October 2008.

Economists polled by Reuters had forecast an unchanged rate and remain confident it will soon fall back as the economy slows.

“It’s not a nice number but I wouldn’t panic,” said Martin van Vliet, an economist at ING Bank in Amsterdam, who sees inflation moving lower over the next few months as oil and food prices ease.

“Still, I think today’s figures will mean the ECB does not lower interest rates next week.”

Expectations had been growing among investors of a possible interest rate cut to support the weakening European economy as the region’s debt crisis and government spending cuts sap business confidence and raise the spectre of another recession.

Other data out yesterday highlighted the extent of Europe’s slowdown.

German retail sales fell at their fastest monthly pace in more than four years in August, tumbling 2.9% on the month, as fears of the eurozone debt crisis spiralling out of control weighed on consumer sentiment, while French consumer spending was flat over July and August.

Investment bank JP Morgan said last week it sees the ECB cutting rates by 50 basis points to 1% next week. A Reuters poll of 76 economists this week found 56 forecasting no move at President Jean-Claude Trichet’s last meeting but a majority expecting a cut in early 2012, following two rate rises this year.

The ECB changed its tone at its last rates meeting in early September and opened the door to cuts, signalling that it had halted a cycle of interest rate rises begun five months ago.

Trichet said then that there were “intensified downside risks” for the eurozone’s economy and the bank expects inflation to be below 2% in 2012.

For Trichet to use his swansong to cut rates while inflation is so far above the ECB’s target of close to, but below, 2% would run totally against the grain of the central bank.

The eurozone may have to wait for further signs of slowdown, and easing price pressures, before it gets looser monetary policy — though both look set to happen.

“The downturn has eased commodity prices... Consequently, we should see an easing of energy price inflation, the largest contributor to headline inflation in past months,” said Clemente De Lucia, an economist at BNP Paribas.