ECB rate cut possible as inflation stays unchanged

European inflation was unchanged in January, raising prospects that the ECB may cut the benchmark as low as 0.5% this year.

The inflation rate in the 17-nation eurozone was 2.7%, the same rate as in December, the European Union’s statistics office said yesterday. The ECB aims to keep inflation just below 2%.

Europe’s economy is showing signs of contraction as austerity measures across the region undermine consumer demand, making it more difficult for companies to pass on higher energy costs.

ECB president Mario Draghi on Jan 12 cited rising energy costs among the main reasons for faster inflation and called risks to the price outlook “broadly balanced”.

“It may seem like price pressure at first glance, but there’s a significant easing ahead,” Mario Jung, an economist BHF Bank in Frankfurt, said before today’s report. “In the fourth quarter at the latest, we’ll reach inflation rates just below 2%. We expect the ECB to cut the benchmark as low as 0.5% this year.”

Eurozone inflation may average 2% this year, down from an estimated 2.7% in 2011, the ECB said on Dec 8. Next year, consumer prices may increase 1.5% on average, it said.

Crude oil prices have increased 7.4% over the past three months, eroding consumers’ purchasing power just as governments from Spain to Greece toughened austerity measures. European unemployment held at the highest in almost 14 years in December.

In France, consumer spending dropped 0.7% in December from the previous month as President Nicolas Sarkozy prepared to implement the second round of tax increases and spending cuts in less than six months. Italian consumer confidence remained at a 16-year low in January after further government budget cuts.

The statistics office is scheduled to release a breakdown of January consumer prices later this month. Eurozone core inflation, which excludes volatile costs such as energy, held from November to December at 1.6%.

The ECB has cut its interest rates twice over the past three months, bringing the benchmark to 1%, matching a record low.