Eurozone Inflation Rising, Confidence Waning

Oct. 6, 2011 - PRLog -- Eurozone consumer price inflation jumped unexpectedly to 3.0% 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. Analysts at Corolla Financial, who had expected a small rise in inflation, pointed to technical changes in the way price rises are calculated as a contributory factor in the sharp increase. The European Central Bank target for inflation is 2%, and the bank raised interest rates in July from 1.25% to 1.5% in order to combat rising prices. 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. However, according to analyst Adam Taylor of Corolla Financial, “the continuing debt crisis makes further rate rises in the coming months unlikely, and with weakening optimism for economic growth in the Eurozone, it is highly unlikely that policymakers would take that risk.”  Even if rates stay where they are, the ECB is widely expected to expand its policy of providing unlimited liquidity to eurozone banks. So far it has pledged to continue doing so until early next year – but that deadline is likely to be extended. It could also reintroduce unlimited 12-month loans, in addition to existing offers of weekly, monthly and three-month liquidity.

According to official figures released at the end of September, economic confidence has continued to fall in the Eurozone; yet another sign that recovery is grinding to a halt in the wake of a debt crisis that has raised questions about the future of the euro currency. This decline in confidence is likely to pile the pressure on the European Central Bank to reverse its course and start cutting interest rates, if not in October, then in November. The European Commission’s economic sentiment indicator fell 3.4 points to 95.0, bringing it well below the long-term average of 100 and its lowest level in nearly two years. The September fall comes on top of two large drops in July and August, prompting concern about the third quarter. The three month stretch was dominated by recurrent concerns about the ability of the eurozone to deal with its debilitating debt crisis, which in recent weeks has plagued the banking sector over fears of some institutions’ exposure to Greek debt.

# # #

About Corolla Financial:
Corolla Financial specializes in providing a range of financial advisory and brokerage services to personal and corporate clients. Regardless of what stage of life or business you are at, Corolla delivers comprehensive advice and services custom designed to address your needs.