Deflation, Euro’s rally raise pressure on ECB to cut rates again
LONDON (CNNMoney) Alarm bells are ringing again over the health of the European economy, after a surprising fall in inflation last month.
With eurozone unemployment stuck at record levels above 12% and the economy failing to generate momentum after emerging from recession earlier this year, some analysts are warning that the region is at risk of sinking into a Japanese-style era of deflation and stagnation.
Such talk has led to calls for the European Central Bank to cut interest rates to a new record low when it meets Thursday, or at the latest in December, to inject new impetus into the weak recovery and take some of the heat out of a rally in the euro.
The currency hit a two-year high of $1.38 last week before falling back after the October inflation numbers.
But it’s still up 5% since March — boosted by the return to growth and expectations that the Fed will delay any tightening of U.S. monetary policy until 2014 — and that makes it harder for struggling euro zone states such Italy, Spain and Portugal to export their way out of trouble.
Eurozone inflation fell to 0.7% in October, from 1.1% in September, with food prices and the cost of services coming under the most pressure. Over 19 million people are out of work in the euro zone, keeping a firm lid on wages and depressing domestic demand.