European inflation falls as oil slides, analysts forecast

Business Materials 31 October 2008 07:03 (UTC +04:00)

European inflation edged down in October, data to be released Friday is forecast to show, adding to the likelihood of the European Central Bank delivering another hefty cut in interest rates next week, dpa reported.

Analysts expect the European Union's statistics office to say in its preliminary estimate for October that inflation in the 15-member eurozone edged down to 3.2 per cent or even 3.1 per cent from 3.6 per cent in September.

Another reduction in borrowing costs by the ECB would also form part of a new wave of rate cuts by the world's leading central banks with the US Federal Reserve on Wednesday joining the monetary authorities in Norway and China in reducing the cost of money.

The Bank of England along with the monetary authorities in Switzerland are also expected to follow up this week's rate cut moves.

The forecast drop in eurozone inflation follows the recent fall in energy costs, with oil prices hovering at about 65 dollars a barrel in late European trading Thursday on the prospects that slowing global economic growth will curb demand. In July, oil prices were heading towards 150 dollars a barrel.

Analysts predicted that the drop in energy prices and slowing global growth could pave the way for further falls in inflation in the coming months.

In harmonized European terms, annual German inflation fell from 3 per cent in September to 2.5 per cent this month, its lowest in more than a year.

ECB chief Jean Claude Trichet signalled Monday that the bank's rate-setting council might deliver another cut in borrowing costs at its meeting next month with analysts speculating that further reductions could be in the pipeline.

"I consider possible that the Governing Council will decrease interest rates once again at its next meeting on November 6," said Trichet.

"It is not a certainty, it is a possibility," he said.

Analysts believe the grim economic outlook combined with dwindling inflation gives the ECB scope to follow up the 50-basis cut it delivered in July as part of a coordinated action by the world's leading central banks to shore up the global economy with another 50- basis points cut next Thursday.

Indeed, since July the economic climate in the eurozone has continued to worsen with business confidence Germany and France falling sharply amid signs that consumers in the currency bloc's two biggest economies were also growing concerned about a looming recession.

Economic confidence in Europe plummeted in October to its lowest level in 15 years, a key survey released Thursday said.

The ECB's rate reduction in July lowered the cost of borrowing in the eurozone to 3.75 per cent.