Euro zone factory gate prices fall
The fall in prices reinforced the case for an ECB interest rate cut
By CFOWorld staff | CFO UK | Published 15:40, 03 July 12
Factory gate prices fell in the euro zone countries in May from 0.5 percent in April, according to European Union's statistics office Eurostat on Tuesday, as crude oil continued its fall.
The unexpected fall in prices in May as the cost of energy dropped sharply reinforced the case for an ECB interest rate cut as early as this week to aid the region's stagnant economy.
The International Monetary Fund says now is the time for the European Central Bank to cut interest rates to help the euro zone, where many economies are in recession, although with rates already at a record low 1 percent, any impact may be limited.
A ECB cut in rates, which is widely expected on Thursday, should in theory make it cheaper for the euro zone's squeezed households and companies to borrow.
After months of stubborn consumer and industrial inflation, price pressures have abruptly eased, mainly because crude oil that traded at more than $120 a barrel earlier this year is now below $100, pushed down by the weakening global economy.
That was evident in the producer price inflation data, which on an annual basis rose at a slower rate than expected, climbing 2.3 percent in May versus forecasts of a 2.5 percent increase.
Within the index, energy prices for factories in the euro zone tumbled 1.4 percent in May from April, after rising as much as 2.6 percent at the start of the year.
Concerns among businesses and investors that the euro zone's prolonged debt crisis is no closer to any lasting resolution has started to eat away at the resilience of the US and Chinese economies, stifling global growth and hitting oil.
With commodity prices lower and the euro zone's economy expected to have contracted in the April-to-June period, consumer inflation has also fallen, to 2.4 percent in June.
"With inflation pressures expected to weaken substantially, the ECB has room, albeit limited, to ease policy rates and signal a commitment to a more accommodative stance for a prolonged period," the IMF said in a report last month.
The ECB left rates at 1 percent last month and ECB President Mario Draghi argued it was up to governments, not the bank, to take steps to help calm the crisis that has intensified as Spain and Cyprus became the latest countries to seek a rescue.
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