Tuesday December 2, 11:01 AM
UPDATE 1-Euro zone Oct PPI falls, backs case to slash rates
By Jan Strupczewski
BRUSSELS, 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 interest rate cut.
A drop in the cost of energy and intermediate goods pulled down prices at factory gates in the 15-country area by 0.8 percent against September for an annual rise of 6.3 percent, the European Union's statistics office said.
Economists polled by Reuters had expected a 0.3 percent monthly fall and a 7.0 percent year-on-year gain. Eurostat also revised September's producer price move to a fall of 0.3 percent on the month instead of the previously reported 0.2 percent.
'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,' said Holger Schmieding, economist at Bank of America (NYSE: IKJ - news) .
Euro zone consumer price inflation plunged to 2.1 percent in November from 3.2 percent in October, Eurostat estimates showed. The European Central Bank, which meets on rates on Thursday, aims for annual inflation in the euro zone of just below 2 percent.
'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,' Schmieding said.
Producer prices are an indication of inflationary pressure because rises, unless absorbed by retailers via lower profit margins, are eventually passed on to consumers.
The ECB slashed rates by 50 basis points in both October and November to the current level of 3.25 percent, saying inflation pressures were falling.
The market consensus is that the bank will cut rates again by 50 basis points to 2.75 percent, but many economists argue a reduction of 75 to 100 basis points would be better. Markets have fully priced in a 0.75 percentage point cut.
'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,' said Howard Archer, economist at Global Insight.
'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,' he said.
October's monthly fall stemmed mainly from a 2.0 percent decline in the price of energy, whose annual growth rate slowed to 15.8 percent from 20.4 percent in September.
(Reporting by Jan Strupczewski, editing by Dale Hudson and Stephen Nisbet) Keywords: EUROZONE ECONOMY/PPI
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