LONDON – Pressure is mounting on the European Central Bank to cut interest rates this week after figures Tuesday showed inflation in the euro area at a three-year low and unemployment at another record high.
Expectations were already high that the ECB would cut its main interest rate from its all-time low of 0.75 per cent at its monthly policy meeting on Thursday despite reservations from some members on its governing council.
Analysts said Tuesday’s figures from Eurostat, the European Union’s statistics office, have increased the likelihood of a reduction in borrowing rates.
Consumer prices rose 1.2 per cent in the year to April across the 17 EU countries that use the euro — its lowest level since February 2010 and way down on the 1.7 per cent rate recorded in March. The figure also took markets by surprise. They had been expecting a modest decline to 1.6 per cent.
The preliminary April rate is way below the ECB’s target of keeping inflation “close to but below” 2 per cent and therefore gives the central bank more room for manoeuver.
“If an ECB rate cut on Thursday didn’t look nailed-on before, it certainly does now,” said Craig Erlam, market analyst at Alpari.
Eurostat indicated that falling energy prices were largely behind the fall as well as lower service sector inflation. A fuller explanation behind the drop will emerge in a more detailed report in May.
The pressure to cut interest rates was given even further weight Tuesday with the release of figures showing unemployment in the eurozone rising to another record of 12.1 per cent in March from the previous month’s 12 per cent.
With 19.2 million people out of work in the eurozone, up 62,000 during the month, policymakers have a huge task ahead of them to turn the region’s economy around and keep their long-suffering people on board as they suffer the effects of austerity measures designed to get public finances into shape.
While Germany, Europe’s largest economy, has an unemployment rate of just 5.4 per cent, others such as Spain are languishing with a record jobless rate of 26.7 per cent. Greece has the highest unemployment rate in the eurozone though its figures are compiled on a different timeline. In January, its jobless rate stood at 27.2 per cent.
Even grimmer is the picture on the youth unemployment front — in Spain, 55.9 per cent of under 25s are out of work while in Greece the rate is an even more startling 59.1 per cent.
Economists warn that a quarter-point interest rate cut is unlikely to turn the eurozone economy around by itself and are calling on the ECB to do more, such as ramping up a lending program to small and medium-sized enterprises (SMEs).
“It now seems pretty certain that it will lower interest rates and we hope that some additional non-conventional measures will be announced to address credit constraints for SMEs and in peripheral countries,” said Marie Diron, senior economic adviser at Ernst & Young.