BRUSSELS Euro zone economic sentiment improved across all sectors in January, rising for the third month in succession in a sign the economy is emerging from a low point in the fourth quarter of 2012 and diminishing the chance of an ECB rate cut.
The European Commission's economic sentiment index rose to 89.2 points in January from 87.8 points in December, against market expectations of an improvement to 88.2.
"The third successive, and appreciable, rise in euro zone economic sentiment to be at a seven-month high in January adds to the evidence that euro zone economic activity bottomed out around last October and growth prospects are brightening," said Howard Archer, economist at IHS Global Insight.
"Reduced euro zone sovereign debt tensions and improved financial markets are clearly boosting sentiment overall, but it remains to be seen to what extent and how quickly this will feed through to boost euro zone economic activity," he said.
Separately, the Commission's Business Climate Index - which points to the phase of the business cycle - also rose, to -1.09 points from -1.11 in December. Both indices have been improving since October where they reached low points.
"Overall, the series of positive surprises on euro zone survey releases in January support our growth scenario," said Evelyn Herrmann, European Economist at BNP Paribas.
"While euro zone leading indicators are still at levels in line with contraction in overall economic activity in the euro zone, their upward trend supports our forecast of a slowdown in the pace of contraction from -0.4% q/q in Q4 2012 to -0.1% in Q1 2013 in the euro zone GDP aggregate," she said.
The Commission data released on Wednesday showed sentiment improved the most among consumers and in construction, but also in services - the biggest sector of the euro zone economy, which generates two-thirds of the single currency area's GDP.
Sentiment was also more upbeat in industry and the retail trade.
The Commission survey showed that inflation expectations among manufacturers eased to 2.1 from 2.5 in December and that the service sector expects prices to fall.
Consumers were expecting their financial situation to improve over the next 12 months, unemployment to fall and more were planning major purchases. Consumer inflation expectations in 2013 also showed expectations of an easing, to 21.8 from 23.7.
Economists said the data made it less likely that the European Central Bank would consider another interest rate cut in its main refinancing rate, now at 0.75 percent, to support the economy.
"The recession in the euro zone is coming to an end. An interest rate cut by the ECB should therefore be off the agenda once and for all. Even so, this doesn't mean the all-clear yet for the peripheral countries," said Christoph Weil, economist at Commerzbank.
(Reporting by Jan Strupczewski; editing by Rex Merrifield)