U.S. Markets

Euro zone inflation eases off ECB target, may complicate rate hike plan

BRUSSELS (Reuters) - Euro zone inflation slowed in December more than markets had forecast and moved away from the European Central Bank target, a preliminary estimate showed on Friday, strengthening predictions that a hike in interest rates may not come this year.

FILE PHOTO: A woman carries her shopping bags in downtown Hamburg, Germany, January 25, 2018. REUTERS/Fabian Bimmer

The European Union’s statistics agency Eurostat estimated that prices in the 19-country currency bloc rose 1.6 percent in December on the year, slowing from 1.9 percent in November.

Inflation was held back by a sharp slowdown in energy prices, while core indicators remained stable at low levels.

The easing was larger than expected by a Reuters poll of economists that pointed to a 1.8 percent inflation in December.

The unexpected fall brings inflation below the European Central Bank target of a rate below, but close to 2.0 percent, complicating plans for a possible hike in interest rates.

The ECB promised in December to keep rates at current record lows at least through next summer and made no attempt to change market expectations that a first post-crisis interest rate rise will come only in early 2020.

The December figures strengthened the view that no hike should be expected this year.

“With inflation moving away from the target and an economy that is slowing, the question is whether the ECB will see a chance to hike at all this year,” Bert Colijn, economist at ING bank said.

The ECB forecast inflation at 1.8 percent in 2018 and at 1.6 percent this year, but some economists were less optimistic.

“Inflation is clearly below 2 percent, the ECB is in no hurry to lift rates any time soon,” Marc Brutsch, economist at Swiss Life insurer said, predicting a 1.7 percent rate in 2018 and a drop to 1.4 percent this year.

In a remark that seems to confirm economists’ expectations, ECB policymaker Benoit Coeure said on Friday that interest rates were set to remain at low levels as long as needed to bring inflation back to its target.

Inflation slowed mostly because of easing energy prices which rose 5.5 percent year-on-year in December after a 9.1 percent rise in November.

The core indicator watched closely by the ECB for its monetary policy decisions, which excludes volatile energy and food prices was stable at 1.1 percent in December, and in line with market expectations.

A narrower indicator that excludes energy, food, alcohol and tobacco was also stable at 1.0 percent, matching forecasts.

Bond yields across the bloc rose after Friday's inflation estimates. German 10-year yields hit a session high at 0.189 percent, up more than 3 basis points on the day DE10YT=RR.

“While the recent pick-up in wage growth may well push the core rate up a little this year, as energy inflation looks set to keep falling sharply, headline inflation will probably drop to about 1 percent by the middle of the year,” Jack Allen, economist at Capital Economics said.

Eurostat’s flash estimate does not include a monthly calculation.

In a separate release, Eurostat said industrial producer prices dropped in November by 0.3 percent in the euro zone on the month, more than the 0.2 percent fall forecast by economists polled by Reuters.

The drop followed a 0.8 percent increase of prices in October.

On the year, prices went up by 4.0 percent in the euro zone in November, Eurostat said.

Reporting by Francesco Guarascio in Brussels; Additional reporting by Francesco Canepa in Frankfurt; Editing by Richard Balmforth