European Economies: Inflation Drops to Four-Year Low
Feb. 27 (Bloomberg) -- The inflation rate in the dozen nations sharing the euro plunged to the lowest level in more than four years in February, giving the European Central Bank room to cut interest rates as soon as next week to spur the economy.
Consumer prices climbed 1.6 percent in February from a year earlier, the slowest pace since November 1999, the Luxembourg- based European statistics office said. Business confidence was unchanged in February and consumer confidence rose, European Commission surveys showed.
French Prime Minister Jean-Pierre Raffarin and German Chancellor Gerhard Schroeder this week added to pressure on the ECB by calling for a cut in the benchmark rate from a half- century low of 2 percent to stem the euro's 14 percent advance against the dollar in the past six months.
``Inflation is very modest and the ECB has achieved its main target,'' said Christoph Leitl, president of Eurochambres, a Brussels group that represents more than 15 million companies in Europe. ``It should now obey other targets and focus on the economy.'' Eurochambres is calling for a half-point cut.
The euro was little changed after the inflation report, trading at $1.2414 at 2:15 p.m. in Brussels. The single currency slid from last week's record $1.2930 after Schroeder and Raffarin pushed the politically independent central bank to lower rates.
Exchange-Rate Risks
Volkswagen AG, Europe's biggest carmaker, said last week it will reduce its dividend for the first time in 11 years as earnings fell 60 percent, partly because of the dollar's drop.
``We'll be keeping a close eye on the biggest risks such as exchange rates,'' said Rupert Stadler, chief financial officer of Audi AG, Volkswagen's luxury car division. Audi's net income was reduced by 400 million euros last year because of exchange rates.
The ECB has left its main lending rate unchanged since June. Central bankers including Gertrude Tumpel-Gugerell have said a reduction is not on the agenda. ECB President Jean-Claude Trichet said Feb. 16 rates are ``appropriate.'' The bank's 18-member policy-setting council meets next Thursday in Frankfurt.
``The inflation figures are raising the likelihood of a rate cut, but it won't come next week,'' said Adolf Rosenstock, an economist at Nomura International Plc. ``That would be a big deal.''
An inflation gauge that strips out food and energy prices rose to 1.7 percent in January from 1.6 percent in December, today's figures showed. The increase in ``core'' inflation means the ECB may wait for more evidence before cutting interest rates, said Stephane Deo, an economist at UBS Warburg SA in Paris.
`I Hear, Don't Listen'
In the past, the ECB has responded to political pressure by delaying interest-rate cuts. ``I hear, but do not listen,'' Wim Duisenberg, Trichet's predecessor, said of the political chorus on April 11, 2001, after the ECB refused to follow the U.S. Federal Reserve, Bank of England and Bank of Japan in easing monetary policy. It didn't act until a month later.
Investor expectations of a cut have grown in the past month, futures trading shows. The rate on the three-month contract for June settlement has dropped 20 basis points since the end of January, to 1.96 percent. That's nine basis points less than the current three-month lending rate, suggesting some traders expect an ECB reduction by the end of June.
Stalling Recovery
European economic growth slowed to 0.3 percent in the fourth quarter from 0.4 percent in the third. Exporters such as tiremaker Michelin & Cie and drugmaker Schering AG blame the euro's rise for denting their profits.
So far, Europe's recovery from a second-quarter contraction has been has been led by faster growth overseas. The economy expanded 1 percent in the U.S. in the fourth quarter, 1.7 percent in Japan and 0.9 percent in the U.K., one of three European Union countries not using the euro.
``A rate cut is warranted in order to generate the domestic demand that is needed,'' said Michael Hume, an economist at Lehman Brothers Holdings Inc. in London.
The euro's advance has contributed to the slowdown in inflation by reducing energy prices and other imported goods priced in dollars. Germany's inflation rate fell to 0.9 percent in February, the lowest since July.
Europe's inflation rate in February was lower than the 1.8 percent forecast by economists in a Bloomberg News survey. The ECB's policy is to keep the cost-of-living rate below yet ``close to'' 2 percent.
Revised figures put January's rate at 1.9 percent, dipping below the ECB's limit for the first time since July. Consumer prices fell 0.2 percent in January alone. Final February figures and a full breakdown will be released March 17.
No Pricing Power
``It would be too early to increase prices,'' said Bart Gonnissen, chief financial officer of Carestel NV, Belgium's biggest operator of roadside restaurants. ``The consumer wouldn't take it. It wouldn't be possible right now.''
A business confidence index compiled by the Brussels-based commission, based on a survey of 25,000 companies, was unchanged at minus 6 in February, matching economists' forecast. Consumer confidence rose to minus 14 from minus 15, better than the minus 16 expected.
The commission's business confidence index reached a low of minus 31 in July 1993 and a high of 6 in September 2000. Consumer confidence dropped as low as minus 29 in August 1993, and rose as high as 3 in April 2000.
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