Easing inflation, wages aid case for eurozone stimulus


Reuters

BRUSSELS/LONDON — Inflation pressures in the eurozone are easing, data showed on Friday, giving governments and central bankers a touch more leeway for stimulus as the region’s leaders seek to shift their focus to reviving economic growth. Modest wage growth and a cooling of food price pressures drove annual eurozone inflation down to 1.8 percent in February, its lowest level since mid-2010, the EU’s statistics office said on Friday. The figure, which confirmed Eurostat’s flash estimate from March 1 and was as expected by economists polled by Reuters, is around the European Central Bank’s target of below but close to 2 percent. Combined with only very modest wage increases in the fourth quarter of 2012, the data highlights the weakness of the eurozone economy and will fuel expectations in some quarters that the ECB could cut interest rates this year. “With inflation set to undershoot the ECB’s objective, an interest rate cut appears to be largely constrained by the prospect of an economic recovery in the second half of this year,” Citigroup said in a research note on Friday. But with commercial bank lending in the eurozone still subdued despite base rates being at a record low of 0.75 percent, others are skeptical about the impact of another cut. Three quarters of economists expect the ECB to leave rates unchanged for the rest of the year, according to a Reuters poll published on Wednesday.

Already in recession in 2012, the eurozone economy is expected to shrink 0.3 percent this year as households and businesses struggle with the fallout of the bloc’s public debt crisis and government spending cuts. Thousands of protesters called on EU leaders, whose two-day summit in Brussels is due to end on Friday, to put an end to the austerity blamed for record unemployment in parts of Europe. “Market pressure on European governments has been replaced by people pressure as a result of austerity and reform fatigue,” said Barclays economist Philippe Gudin.