Euro zone inflation near decade low, jobless up

BRUSSELS Fri Jan 30, 2009 11:15am GMT

BRUSSELS (Reuters) - Euro zone inflation plunged this month to its lowest in almost 10 years and unemployment rose, data showed, boosting pressure on the ECB to cut interest rates further as price growth is now well below its target.

The euro weakened against the dollar and Bunds trimmed losses as the data further underlined the region's vulnerability.

European Union statistics office Eurostat estimated that consumer prices in the 16 countries using the euro rose 1.1 percent year-on-year in January, a level last seen in July 1999, down from 1.6 percent in December and 2.1 percent in November.

The Eurostat estimate does not contain monthly numbers or any detailed data, but economists said the sharp drop stemmed from a steep fall in oil prices against the same period of 2008.

Unemployment rose in December to 8.0 percent -- its highest since November 2006 and above consensus forecasts -- from an upwardly revised 7.9 percent of the workforce in November, Eurostat said.

"The inflation number was definitely a shock, a much bigger-than-expected drop, and just shows how strong disinflationary pressures are in Europe and it will put pressure on the European Central Bank to have further easing," said Matthew Sharratt, economist at Bank of America.

The ECB wants to keep inflation below, but close to, 2 percent and several members of its rate-setting council have expressed concern that inflation should not fall too far below the target. They have dismissed, however, any risk of deflation.

Having cut interest rates by a total of 225 basis points since October to 2.0 percent, the bank has signaled it will pause in February and consider further cuts in March.

"Today's data will probably make for a more difficult decision for the ECB next week due to the disinflation and sharper-than-expected rise in unemployment. They have probably put themselves into a corner," Sharratt said.

Some economists said the data increased the chances that the ECB would cut rates in February, despite suggestions of a pause.

"The fall in euro zone consumer price inflation being much sharper than expected in January, there has to be a very real possibility that the ECB will bring forward the interest rate cut to next week," said Howard Archer, economist at IHS Global Insight.

Many economists expect the ECB to reduce borrowing costs to around 1 percent by mid-year, when inflation is likely to be negative because of a strong drop in oil prices.

(Additional reporting by Huw Jones, editing by Dale Hudson)

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