Oct. 27 (Bloomberg) -- Inflation in Germany, Europe’s largest economy, slowed in October.
Inflation, calculated using a harmonized European Union method, eased to 2.8 percent from 2.9 percent in September, the Federal Statistics Office in Wiesbaden said today. That’s in line with the median forecast in a Bloomberg News survey of 22 economists. Prices were unchanged in the month.
Europe’s worsening debt crisis and slowing global growth may crimp demand for oil, the main driver of inflation this year, making it easier for the European Central Bank to cut interest rates. While euro-region inflation accelerated to 3 percent in September, well above the ECB’s 2 percent ceiling, Governing Council member Ewald Nowotny said on Oct. 25 that the central bank doesn’t see any inflation risks.
“It’s always difficult for the ECB to cut rates if inflation is elevated, particularly at these levels,” said Laurent Bilke, a former ECB forecaster and now Head of global inflation strategy at Nomura International in London. “But the economic outlook in Europe is worsening, taking any future pressure out of the oil market, which means the inflation rate will fall below 2 percent early next year.”
Euro-area services and manufacturing output shrank at the fastest pace in more than two years in October, adding to signs the region’s economy is cooling amid the sovereign debt crisis and slowing global demand. Crude oil prices have dropped 18 percent in the past six months to $92 a barrel.
In Germany, business confidence fell to a 16-month low in October and investor confidence plunged to the lowest in three years on concern that company earnings may suffer.
While Germany’s Bundesbank on Oct. 17 predicted “strong” growth in the third quarter due to a rebound in industrial production and private consumption, it said the outlook has deteriorated. German growth came to a near halt in the three months through June.
The ECB will be forced to lower its benchmark rate, which it increased twice this year, by a quarter percentage point to 1.25 percent in December, according to the median forecast in a Bloomberg News survey of 34 economists conducted last month.
While ECB policy makers have so far resisted pressure to lower rates, incoming President Mario Draghi said yesterday there are “significant” downside risks to the economic outlook in the 17-nation euro area.
By contrast, ECB Executive Board member Juergen Stark said the economic slowdown will be temporary and warned that if borrowing costs are left too low for too long they may fuel “new asset-price bubbles.” Stark said the ECB’s key rate at 1.5 percent is “appropriate.”
Europe’s leaders last night came a step closer to solving the debt crisis by cajoling bondholders into accepting 50 percent writedowns on Greek debt and boosting the rescue fund’s capacity to 1 trillion euros ($1.4 billion).
--With assistance from Kristian Siedenburg in Vienna and Jeff Black in Frankfurt. Editors: Matthew Brockett, Fergal O’Brien
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