Energy fuels euro inflation but ECB rate cut still on

(Reuters) - Euro zone inflation accelerated in September as energy costs soared but core prices stayed low, likely leaving the European Central Bank on track to cut interest rates soon.


Consumer prices in the 17 countries sharing the euro rose 2.7 percent year-on-year, the European Union's statistics office Eurostat said on Friday in a first estimate that marked a rise from 2.6 percent in August.

Markets had expected inflation to ease to 2.5 percent. Energy prices jumped 9.2 percent after a 8.9 percent rise the previous month.

Core inflation, excluding both energy and unprocessed foods, fell to its lowest level in a year of 1.7 percent in August, the latest month for which the data has been published.

Together with recent data indicating that the euro zone economy entered a recession in the third quarter, Friday's inflation reading kept intact expectations that the ECB will not wait long before delivering a growth-boosting rate cut.

"It seems highly likely that the ECB will take interest rates down from 0.75 percent to 0.50 percent in the fourth quarter," said Howard Archer, economist at IHS Global Insight.

"While the ECB could act as soon as its October meeting next Thursday, we lean towards the view that they will probably hold off to November."

Just 14 of 73 economists polled by Reuters this week expect the ECB to cut rates when it meets next Thursday but a majority expect the bank to have lopped off 25 basis points by the end of the year. 

The ECB kept its main interest rate unchanged at a record low of 0.75 percent at its meeting earlier this month, taking another policy-easing route by agreeing to launch a new and potentially unlimited bond-buying program.  

MUTED PRICE PRESSURES

Inflation fell steadily from 3 percent in November 2011 to stabilize at 2.4 percent in May, June and July, as the euro zone economy slowed sharply as a result of the sovereign debt crisis. But it rose again for the first time in 11 months in August due to higher fuel and transport costs.

The ECB's target is to keep inflation below, but close to 2 percent, a rate it is not expected to drop back to for some time, though price pressures should ease further as the economy continues to struggle.

"Euro zone inflation should resume its downward trend before long as previous sharp increases in energy and food prices cease to boost the annual rate," said Martin Van Vliet, economist at ING bank.

"But with commodity prices remaining high and volatile, and further VAT hikes in the pipeline (e.g. in the Netherlands next month and in Finland in January), it is probably going to be a very gradual descent," he said.

Headline inflation might stay above 2 percent well into next year. "The bottom line, however, is that underlying inflation pressures remain muted in most parts of the euro zone economy. This gives the ECB scope to ease monetary policy further," he said.

In September, Eurostat for the first time provided year-on-year prices changes in the index's components - food, alcohol and tobacco, energy, non-energy industrial goods and services.

It publishes a more detailed breakdown for September as well as monthly inflation figures on October 16.

reuters.com