Euro zone factory prices cool, give ECB room for rate cut

BRUSSELS Mon Jun 4, 2012 8:04am EDT

BRUSSELS (Reuters) - Euro zone factory prices were unexpectedly stable in April from March, marking the fourth straight month of weakening inflation pressures and offering the European Central Bank some space to cut interest rates as the continent's economy slumps.

Prices at factory gates in the 17 countries using the euro were unchanged in the month, the European Union's statistics office Eurostat said on Monday.

Economists in a Reuters poll had forecast a 0.2 percent rise, while producer price inflation on an annual basis was also lower than expected at 2.6 percent in April. That compared to a 2.7 percent estimate seen by economists.

High world oil prices this year have limited the ECB's ability to cut rates below its record 1 percent level as it focuses on containing consumer inflation.

But concerns about a slowdown in the world economy have brought crude to below $100 a barrel in recent days. While only 11 of 73 economists polled by Reuters expect a rate cut this Wednesday at the bank's monthly meeting in Frankfurt, investors will be listening carefully for any change in tone.

Crucially, energy price inflation at euro zone factories fell 0.1 percent in April, having risen sharply in the first three months of the year.

Consumer price inflation also fell more than expected in May, to 2.6 percent from 2.4 percent in April, after several stubborn months where prices were kept high by the cost of energy in the euro zone.

That was the lowest level since February 2011, but still above the ECB's medium-term target of close to, but below, 2 percent.

A majority of economists still see the ECB holding rates until the end of next year, but the euro zone's stagnant economy, along with a disappointing U.S. jobs report last week and cooling growth in China and Brazil, could change that view.

A growing minority of economists see a rate cut before the end of this year.

With the euro zone debt crisis intensifying across southern Europe, any worsening of the two-year long saga could push the ECB to cut rates and pour more cheap, long-term funds into the banking system following its earlier, 1 trillion euro stimulus, economists say.

(This story corrected the day of ECB meeting to Wednesday, not Thursday)

(Reporting By Robin Emmott; editing by Rex Merrifield)