May 31, 2009

Euro Zone Interest Rate Falls to Zero


Published: May 29, 2009


PARIS — The annual inflation rate for the euro area was unchanged over the year to May, compared to a 0.6 percent gain in April, the European Union statistics agency said Friday in a preliminary report.


A breakdown of the data is not yet available, but analysts said the drop was largely attributable to lower energy and food price inflation, while core inflation, which excludes those volatile prices, probably also fell noticeably.


The annual rate of zero percent in May was below analyst expectations of a rise of 0.3 percent, and was the lowest level of inflation since Eurostat started producing comparable data in 1996.


The rate is likely to dip into negative territory in coming months, due to the high base comparison from mid-2008, before turning positive late this year and rising further in 2010, said Martin van Vliet, an economist at ING in Amsterdam.


“The severe contraction in activity has created a huge margin of spare capacity in the economy, which will exert strong downward pressure on core prices going forward,” he said. “There remains a real risk that the euro zone will see more than a whiff of deflation.”


In Germany, Europe’s largest economy, consumer prices unexpectedly posted the first annual decline since at least 1996 this month. Growing unemployment and feeble wage increases are also likely to keep a lid on any significant rise in prices for some time, analysts said.


The most powerful German union, IG Metall, reached a wage deal in November for a 4.2 percent rise through April 2010. The deal by the union, which represents 3.6 million workers at companies like Siemens and Daimler, consisted of two pay rises each of 2.1 percent, starting Feb. 1. The second increase was due to take effect starting May 1, but many firms, in agreement with unions, are deferring it.


Figures from the European Central Bank released Friday showed a further decline in monetary and credit growth. Annual growth in M3, a broad measure of money supply, posted its sixth consecutive monthly decline in April, falling to 4.9 percent from 5 percent in March.


Annual growth in bank lending to the private sector also continued its decline in April, falling to 2.4 percent from 3.2 percent, with annual growth in lending to the household sector and the non-financial corporate sector also slowing.


Still, the E.C.B. continues to argue against the likelihood of a deflationary spiral taking hold. The bank’s vice president, Lucas Papademos, said this week that “temporary disinflation does not constitute a persistent, broad-based and self-sustaining decline in the overall price level.”


The bank’s president, Jean-Claude Trichet, said this month that the inflation gauge would accelerate again in the second half of the year. The E.C.B. aims to keep inflation just below 2 percent.


Separate data released Friday showed that retail sales in Germany unexpectedly grew in April, raising hopes that consumer spending could help support the economy after a record slump in gross domestic product in the first quarter.


Sales rose by 0.5 percent from the previous month in seasonally adjusted terms, the Federal Statistics Office said. Year-on-year, sales fell by 0.8 percent.



Posted via email from Global Business News

No comments: