Global Economics

Weak Data Ups Pressure for ECB Rate Cut


Unemployment in 16-country euro area reaches two-year high of 8.2%; cut of 50 basis points is expected

The European Central Bank (ECB) is expected to cut interest rates when its governing council meets on Thursday (5 March) following the release of more weak economic data on the European economy.

New figures released by the EU's statistics office, Eurostat, last Friday show unemployment in the 16-country euro area has reached 8.2 percent, the highest level for two years, following the loss of over a quarter of a million jobs in January.

"Unemployment is a clear concern right now in many parts of the euro area," ECB president Jean-Claude Trichet said in Dublin last week.

Labour-market "reforms are very important to counteract the economic downturn and limit its negative impact on employment."

Asked whether the ECB will cut the rate by 50 or 25 basis point in March, Mr. Trichet said "the first figure" is more likely.

Eurostat figures also showed that inflation for the area fell by a record amount in January, down from 1.6 to a paltry 1.1 percent, well below the ECB's desired target of "below, but close to two per cent." Inflation figures for the EU27 fell to 1.7 percent.

Analysts expect the central bank to react to the bad news by cutting interest rates by 0.5 percent when they meet on Thursday.

Euro area interest rates are currently at two percent following steep cuts since the financial crisis started last autumn.

Eurostat now estimates that over 13 million people are unemployed in the euro area, with the highest unemployment rates recorded in Spain on 14.8 percent and the lowest in the Netherlands with 2.8 percent.

The January figures amounted to the tenth consecutive month of rising unemployment in the euro area, as employers cut jobs in the face of falling consumer demand.

The EU27 fared little better, with unemployment rising 0.1 percent in January to reach 7.6 percent.

Falling commodity prices such as oil have contributed to the dramatic drop in inflation, which only last summer hit record highs of 4.0 percent.

The ECB expects inflation to continue to fall until the middle of this year, before gradually starting to increase again. They are adamant however that such a decline does not signal a deflationary spiral.

In the UK, where interest rates are already as low as one percent, the independent Bank of England will take the exceptional measure this week of buying corporate and government debt in a last-ditch attempt to boost the economy.

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