Euro-area inflation drops below ECB ceiling, unemployment rises

The euro-area inflation rate fell below the European Central Bank’s 2 percent ceiling for the first time in more than two years and unemployment climbed to a record as the currency bloc remained mired in recession

Annual inflation slowed to 1.8 percent in February from 2 percent a month earlier, the European Union’s statistics office in Luxembourg said Friday. That’s below the 1.9 percent median of 35 economists’ estimates in a Bloomberg News survey. Unemployment rose to a record 11.9 percent in January.

“Inflation is diverging more and more from the ECB’s target and the balance of risks is shifting to the downside,” Christophe Duval-Kieffer, BNP Paribas SA’s London-based global head of inflation strategy, said by telephone. “Inflation being the needle in the ECB’s compass, these numbers increase the likelihood of a rate cut in the near term and we can certainly expect President Mario Draghi to take a more dovish stance.”

The ECB will maintain its benchmark interest rate at 0.75 percent next week, according to the median of 43 economists’ estimates in a separate Bloomberg survey. The ECB will update its economic forecasts after concerns about political instability in Italy roiled markets. In December, the ECB saw inflation at 1.6 percent this year and 1.4 percent in 2014.

Worst performance

The euro-area economy recorded its worst performance in four years in the fourth quarter with a contraction of 0.6 percent. Gross domestic product will decline again in the first three months before returning to growth in the second quarter, according to the median of 21 economists’ estimates in another Bloomberg survey.

The 17-nation euro slid against all but one of its 16 major peers in February, losing 3.8 percent against the greenback and 3 percent against the yen. Draghi said the ECB is far from exiting stimulus measures. Cooling inflation may open the door for more monetary easing.

Friday’s data “suggest that the euro zone is going to remain a very weak spot on the global stage,” said Julian Callow, chief international economist at Barclays Plc in London. “What the ECB should do if it really is concerned about this is undertake really radical measures, such as buying government bonds and cutting rates. But I don’t expect that.”

While a deposit rate cut is also unlikely, the probability of a refinancing rate reduction has risen after the inconclusive election outcome in Italy, Credit Suisse Group AG strategists led by Helen Haworth wrote in a note this week.

Youth unemployment

Unemployment in the 17-nation euro area rose from a revised 11.8 percent in December, Eurostat said Friday. The European Commission forecasts unemployment rates of 12.2 percent and 12.1 percent for this year and next.

Friday’s report showed that 18.998 million people were unemployed in the euro area in January, up 201,000 from the previous month. The data also showed that youth unemployment is at 24.2 percent, with Spain’s rate more than double that, at 55.5 percent.

“The situation is very serious,” said Alexander Krueger, chief economist at Bankhaus Lampe KG in Dusseldorf. “There’s no support any more from Germany. It’s more or less a sideways movement which I expect to continue. Other economies like Italy, Spain and Portugal are very bad at the moment, so in the end the unemployment rate can only climb.” [Bloomberg]

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