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Euro zone inflation nears ECB goal, joblessness at record

Outside view shows the Euro sculpture in front of the headquarters of the European Central Bank (ECB) in Frankfurt.

ALEX GRIMM/REUTERS

Euro zone inflation fell more than expected in January in a sign that companies were cutting prices to entice shoppers at a time when joblessness remained at a record level at the end of 2012.

The rate of consumer price inflation in the 17 countries using the euro fell to 2 per cent in January compared to a year ago, the EU's statistics office Eurostat said on Friday.

The reading, Eurostat's first estimate, was lower than the 2.2 per cent level forecast by economists polled by Reuters, which was also December's level.

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Unemployment remained at a euro-era high of 11.7 per cent in December, Eurostat also said, slightly lower than the 11.9 per cent level expected by economists, but still higher than the European Commission's year-end 11.3 per cent prediction.

Inflation is now near the European Central Bank's target of close to, but below 2 per cent, and along with record unemployment, gives the ECB bank room to cut interest rates again to stimulate the economy.

But an improvement in euro zone business morale for the third straight month in January and better factory output suggest the bloc has passed the worst of its recession, meaning further ECB stimulus in the form of lower borrowing costs may not be necessary.

"Inflation is non-existent," said Thomas Costerg, an economist at Standard Chartered in London. "Now with German inflation decelerating, that will fuel debate about how to do ECB's easing," he said, forecasting a cut in the ECB's main refinancing rate in the second quarter.

The ECB's Governing Council kept rates on hold at its January meeting and will discuss rate policy again on February 7. The decision to keep policy on hold was unanimous last month, but economists are still divided over the ECB's next move.

Thirty-eight out of 73 analysts polled in January by Reuters said the ECB will remain on hold in the first quarter.

The ECB's task is also complicated by a divide between wealthier, northern countries which are showing signs of emerging from the euro zone's three-year debt crisis and countries such as Spain and Italy, that are in deep recessions.

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"The story in the euro zone remains one of national divergence between the peripheries and the core," said Evelyn Herrmann, an economist at BNP Paribas in London, also pointing to a growing gap between the German and French economies.

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