Wednesday December 3, 10:51 AM
UPDATE 1-Euro zone retail sales sink, argue for deep ECB cut
By Jan Strupczewski
BRUSSELS, Dec 3 (Reuters) - Euro zone retail sales fell much more than expected in October, underlining weak consumer demand in the recession-hit economy and adding to arguments for a deep interest rate cut by the European
Central Bank on Thursday.
Retail sales in the 15-country area fell 0.8 percent month-on-month and 2.1 percent year-on-year -- the fifth straight annual drop, the European Union statistics office, Eurostat, said on Wednesday.
Economists polled by Reuters had expected a 0.4 percent monthly fall and a 1.4 percent annual decline.
'It means another argument, if another one is needed, for the ECB to cut aggressively. We think they will do 75 basis points. We think they are sensible people,' said Holger Schmieding, economist at Bank of America (NYSE: IKJ - news) .
Markets expect the bank will cut interest rates by 50 basis points on Thursday for the third month in a row to help kick-start the economy. But many economists say a deeper cut of 75 to 100 basis points would be more appropriate.
Retail sales are an indication of household demand. Falling private consumption was one of the reasons for a shrinkage in the euro zone economy in the second and third quarters.
Economists had put part of the blame for weakening household demand on high inflation, which reached a peak of 4.0 percent in July. But now that inflation is falling rapidly along with oil prices, consumers are becoming increasingly worried by rising unemployment across the euro zone and growing job insecurity.
Euro zone inflation slowed to 2.1 percent in November from 3.2 percent year-on-year in October, compared with the European Central Bank's target of just below 2 percent.
But euro zone consumer confidence edged closer to 15-year lows in November, data showed last week.
'Falling retail sales in October ... reinforce concerns over the potential length and depth of the euro zone recession,' said Howard Archer, economist at IHS Global Insight.
'This puts extra late pressure on the ECB to cut interest rates sharply. 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,' he said.
(Editing by Dale Hudson) Keywords: EUROZONE ECONOMY/RETAIL
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