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Euro-zone inflation jumps as growth outlook worsens
By Tony Barber in Frankfurt
Published: June 18 2001 19:45GMT | Last Updated: June 18 2001 19:57GMT
The euro-zone was hit by disappointing news on two fronts on Monday with annual inflation soaring above 3 per cent and two German institutes cutting their forecasts for German growth.
The cocktail of rising inflation and a deteriorating economic outlook creates a dilemma for the European Central Bank (ECB) over whether to cut interest rates.
Inflation rose from 2.9 per cent in April to 3.4 per cent in May, its highest level since the euro's launch in January 1999 and far above the ECB's target ceiling of 2 per cent.
The core inflation rate, which excludes volatile energy and food prices, rose from 1.9 per cent to 2.1 per cent, breaking the 2 per cent barrier for the first time since the start of European monetary union.
"The May data are not welcome," a European Commission spokesman said, adding that headline inflation was unlikely to fall below 2 per cent this year.
Julian Callow, economist at Crédit Suisse First Boston, said he expected annual inflation to average 2.8 per cent in the third quarter of this year and 2.6 per cent in the fourth quarter.
The ECB said in its June monthly bulletin that it expected inflationary pressures to ease later this year, partly because of the euro-zone's economic slowdown. The depth of the slowdown was underlined by the decision of two of Germany's leading research institutes to slash their growth forecasts for Europe's largest economy. The Kiel-based Institute of World Economics cut its forecast for this year from 2.1 per cent to 1.3 per, and the Hamburg-based Archive of the World Economy reduced its prediction from 2.3 per cent to 1.7 per cent.
Both estimates are lower than the German government's latest forecast of 2 per cent growth.
Many financial market participants hope the ECB will react to the slowdown, which is spreading from Germany to other euro-zone countries, notably France, by cutting interest rates. But Nigel Anderson, economist at RBS Financial Markets, said the May inflation data posed a considerable obstacle. "It will be very tough for the ECB to explain a rate cut until there has been some clear improvement in inflation," he said.
The main factors behind the surge in inflation last month were higher prices for energy and unprocessed foods.
However, both the ECB and the European Commission say the medium-term outlook is more reassuring. "Medium-term inflation prospects remain good, particularly as inflationary pressures emerging from the demand side are under control," the Commission spokesman said.
The ECB's policymaking Governing Council will meet in Dublin on Thursday but is expected to keep its main interest rate unchanged at 4.5 per cent.
All 12 euro-zone countries except Ireland and Italy reported a rise in inflation last month. The highest rates were 5.4 per cent in the Netherlands and 4.9 per cent in Portugal, according to Eurostat, the European Union's statistical agency.
Among all 15 EU member-states, only the UK at 1.7 per cent had an inflation rate of under 2 per cent.
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