Eurozone Inflation Falls for Second Month

Eurozone inflation appears to be on a clear downward trend after dropping again in September, but not enough to change the widespread view that the European Central Bank will keep its main interest rate on hold this week.

Reflecting oil and other commodity price falls, annual inflation in the 15-country region fell for the second consecutive month, from 3.8 per cent in August, to 3.6 per cent in September, according to a flash” estimate on Tuesday by Eurostat, the European Union’s statistical office.

This week’s rapidly-unfolding financial market crises are proving to be the biggest test yet of the ECB’s policy of separating strictly the extraordinary measures it is taking to calm financial markets from its battle against inflation.

Clear signs that eurozone inflation has passed its peak – it hit a record high of 4 per cent in June and July – has encouraged speculation that the ECB will move towards cutting interest rates, especially with the region’s main economies stagnating or in recession.

But inflation remains far above the ECB’s target of an annual rate below but close” to 2 per cent, and ECB policymakers have warned that at times of financial stress, it is still more important to keep inflation under control. The ECB sees eurozone prices as less flexible than in the US, justifying a tougher monetary policy stance, especially with crucial wage negotiations looming in the German engineering sector.

As a result, financial markets expect the ECB’s main interest rate to be left at 4.25 per cent when its governing council meets on Thursday. A first cut in official borrowing costs is not expected until December or early next year.

Eurozone Inflation Falls for Second Month, Financial Times
9/30/2008 6:57:51 AM