Tuesday December 2, 10:38 AM
INSTANT VIEW 3-Euro zone Oct producer prices drop 0.8 pct m/m
Dec 2 (Reuters) - Euro zone producer prices fell more than
expected month-on-month in October, data showed on Tuesday,
underlining disinflationary trends in the recession-hit economy
and the scope for a deep ECB rate cut.
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Table: Story
KEY DATA
(percentage change)
OCT SEP AUG
Total industry m/m -0.8 -0.3 -0.5
(ex-construction) y/y 6.3 7.9 8.6
MARKET REACTION
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ECONOMIST COMMENTS
HOWARD ARCHER, CHIEF EUROPEAN ECONOMIST, IHS GLOBAL INSIGHT:
'Sharply retreating energy prices (down 2.0 percent
month-on-month in October) resulting from oil prices plummeting
from their July peaks near $147/barrel have been the main factor
behind the retreat in producer prices since July, while the
upward impact from food prices is now waning (evidenced by the
year-on-year rise in non-durable consumer goods dropping to 2.7
percent in October from 4.8 percent in June).
'The ECB will also note that core producer prices fell by
0.4 percent month-on-month in October, causing the year-on-year
increase to retreat sharply to 3.2 percent from 4.1 percent in
September. It peaked at 4.4 percent in July.
'The October producer price inflation add to the now
substantial evidence that inflationary pressures in the euro
zone are retreating sharply. Furthermore, the euro zone
manufacturing purchasing managers' survey for November showed
the companies' prices charged fell at the fastest rate since
July 2003, which was in very marked contrast to the sharp price
rises seen as recently as July. This indicates that sharply
contracting activity and demand is now hammering manufacturers'
pricing power. In addition, the survey showed that input prices
fell sharply in November.
'Given sharply diminishing inflationary pressures and the
ever growing threat of extended, deep euro zone recession, we
believe there is a compelling case for the ECB to slash interest
rates by 100 basis points from 3.25 percent to 2.25 percent on
Thursday. However, we suspect the bank will be reluctant to do
so, particularly as some ECB members have indicated recently
that they believe it is best to keep some ammunition back and
have also voiced concern that too big a cut could hurt
confidence.
'Therefore, we consider it most likely that the ECB will cut
interest rates by 50 basis points to 2.75 percent, although we
certainly would not rule out a larger cut. Further out, we see
the ECB cutting interest rates to 1.50 percent in the first half
of 2009.'
HOLGER SCHMIEDING, BANK OF AMERICA (NYSE: IKJ - news) :
'This is very much better than expected, mainly due to the
fall in oil prices. It shows there is no pipeline pressure left
in the euro zone and this is likely to translate into further
drops in headline inflation shortly.
'We are also seeing inflation pressures easing in industry
excluding construction and energy, where we see a fall in the
annual rate from 4.1 to 3.2 percent. So it is of course energy,
but not only energy. It is a fairly broad-based easing of
inflationary pressures beyond energy.
'The message for the ECB is clearly: don't worry about
inflation, cut now, and a lot. I would say 75 basis points, it's
a minimum. The data clearly supports the case for a big cut.'
LINKS
For further details, Reuters 3000 Xtra users can click on:
http://europa.eu.int/comm/eurostat/
For a one-page snapshot of real-time G7, euro zone and Swiss
economic data releases, click on
Keywords: EUROZONE ECONOMY/PPI
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