Euronomics: Inflation Falls, But Rate Hike Still Likely
24 May 08:25
By Paul Hannon
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--Inflation in the euro zone is likely to have fallen to
the European Central Bank's 2% target in May, but that doesn't mean a rise in
interest rates is off the central bank's agenda for June and July.
Data from German states and Italian cities released Wednesday through Friday
record a sharp fall in the inflation rate for the euro-zone's largest and third
largest economies.
In Germany, the annual inflation rate fell to 1.2% from 1.6% in April, while
in Italy the inflation rate fell to 2.3% from 2.5% in April.
Germany and Italy are the first euro-zone members to release inflation data,
and analysts now expect the inflation rate for the euro zone as a whole to have
fallen to 2% from 2.4% in April. The euro-zone's annual inflation rate hasn't
been below the ECB's 2% target since May 2000.
Economists expect the inflation rate to fall below 2% in June, but that may
not be a source of much comfort for the central bank.
That's because the inflation rate is likely to rise again from July, mainly
because base effects.
Price rises were much sharper in the first half of last year than in the
second half. That means that a given monthly price rise translates into a lower
annual inflation rate during the first half of this year than in the second
half.
So for the inflation rate to remain at or below an annual 2% in the second
half, prices would have to remain virtually flat.
In an interview with Italian financial daily Il Sole 24 published Friday, ECB
Vice President Christian Noyer made it clear the ECB won't be idle if inflation
rises above the 2% target.
"If necessary, the ECB is ready to act to be certain that inflation will fall
below 2.0%," Noyer said. "We absolutely don't want to give the impression that
we are complacent regarding inflation."
Core Inflation On The Rise
There's little in the breakdown of the May inflation numbers to give the ECB
much cause for complacency.
In Germany, declines in volatile food and energy prices knocked an estimated
0.6 percentage points of the May inflation rate. According to UBS Warburg, that
means core inflation rose to 1.7% from 1.6% in April.
"With core inflation remaining stubbornly high .. and an outlook for
unfavorable base effects in food and energy prices in the months ahead, the
risk is the ECB may want to demonstrate its readiness to fight any kind of
inflation threat by more than just words," said Holger Fahrinkrug, an economist
at UBS Warburg in Frankfurt.
In addition to the rise in core inflation, wage pressures are increasing in
the euro zone, particularly following recent deals between German metal workers
and employers.
For the ECB that's a worrying combination, since it increases the risk that
the above-target rates of inflation caused by temporarily high energy and food
prices will become a medium-term phenomenon.
So with recent data indicating that the euro-zone economy is firmly in
recovery, economists believe the ECB will be tempted to raise interest rates
soon.
It could be difficult for the ECB to hike in June, the very month when the
inflation rate is likely to fall below its 2% target. But that wouldn't stand
in the way of a rate rise in early July.
"It seems likely that the ECB will hike rates on July 4," said David Mackie,
an economist at JP Morgan. "The inflation environment argues for a move of 50
basis points."
Other analysts concur, pointing in particular to recent hawkish comments by
ECB President Wim Duisenberg and other ECB council members, including Noyer.
"It is already clear the ECB's inflation tolerance is beginning to break down
and it is simply a matter of when they think it will be best to strike," said
Bear Stearns in a note to investors.
The bank believes there's a 55% chance the ECB will raise interest rates at
its next meeting on June 6, but a 90% chance it will hike on July 4.
-Paul Hannon, Dow Jones Newswires; 44-20-7842 9491;
paul.hannon@dowjones.com
(END) DOW JONES NEWS 05-24-02
08:25 AM |
