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Case for ECB rate cuts gets stronger

Friday, March 15 10:26:35

A cooling of food price pressures in February brought euro zone inflation to its lowest level since mid-2010 and modest wage growth in late 2012 added to signs that the European Central Bank has room for an interest rate cut.

Annual consumer inflation in the 17 countries sharing the euro was 1.8 percent in February, the EU's statistics office said on Friday, confirming its flash estimate from March 1.

That was as expected by economists polled by Reuters and is around the ECB's target of below but close to 2 percent.

Helped by a fall in consumer price inflation for food, alcohol and tobacco in February from January, as well as less price pressure in services, the euro zone's inflation rate fell to its lowest since August 2010, when it was 1.6 percent.

Combined with only very modest wage increases in the fourth quarter of 2012, the inflation data highlights the weak euro zone economy and a growing expectation among investors and economists that the ECB will cut rates again this year.

The ECB kept interest rates at 0.75 percent at its March 7 meeting and while there is scepticism about the impact of another cut, because commercial banks are reluctant to lend, economists argue a rate cut would send a positive sign.

Already in recession in 2012, the euro zone economy is expected to shrink 0.3 percent this year as households and businesses struggle with the fallout of the bloc's public debt crisis and government spending cuts.

But one silver lining in the Mediterranean region is that only very modest wage increases are helping to improve competitiveness after a decade-long boom fuelled by easy credit pushed the euro zone into a false sense of economic wellbeing.

Hourly labour costs in the euro zone rose 1.3 percent overall in the last three months of 2012, compared to the same period in 2011. Wages per hour grew by 1.4 percent.

Those rises were less than half the level of increases in early 2009, at a time when Europeans were giving themselves generous pay hikes, pushing up the cost of labour by 12 percent between 2001 and 2011. Reuters