Europe Inflation Rate Drops

Europe’s inflation rate fell by the most in almost two decades and unemployment increased, adding to pressure on the European Central Bank to continue cutting interest rates to battle the recession.

Inflation in the euro area slowed to 2.1 percent in November from 3.2 percent in October, the European Union’s statistics office in Luxembourg said today. The drop is the biggest since at least 1991 and puts the inflation rate at the lowest in more than a year.

The Frankfurt-based ECB has already cut its benchmark rate by 100 basis points in two moves since early October, part of a wave of reductions by central banks around the globe as they combat the worst financial crisis since the Great Depression. The drop this month brings euro-area inflation close to the ECB limit of just under 2 percent, which it has exceeded every month since September 2007.

Oil prices have dropped by almost two-thirds since reaching a record close to $150 a barrel in July. Crude oil was at $53.67 today, down 21 percent this month alone.

Investors expect the ECB to lower the benchmark rate by at least 75 basis points at a Dec. 4 meeting from the current 3.25 percent, Eonia forward contracts show. While economists at Fortis Bank and Bank of America all expect to see the ECB reduce the rate by 75 basis points to 2.5 percent, most are sticking to their forecast for a 50 basis-point reduction, according to a survey by Bloomberg News. The median of 53 forecasts is for a cut to 2.75 percent.

A 75 basis-point reduction would take the ECB rate to the lowest since May 2006. The ECB has never cut its key rate by more than 50 basis points since it was founded in 1999 and some council members indicated that they don’t favor larger rate cuts. Austria’s Ewald Nowotny said this week that the ECB should keep some firepower” in reserve.

Europe Inflation Rate Drops,
11/28/2008 8:03:32 AM