European inflation stayed below the European Central Bank's 2% limit for a sixth month in February, helped by declining oil prices and the impact of a stronger euro on the price of imports.
The inflation rate in the euro area stayed at 1.8% for a second month, the European Union's statistics office in Luxembourg said today. Economists had forecast February inflation at 1.9%. The lower-than-expected consumer-price growth increases the chance that average inflation this year will drop below the ECB's ceiling for the first time since 1999. That may not stop the central bank raising its benchmark rate more as it is concerned the pace of economic expansion will fan inflation. „The ECB has said the likely easing in inflation is temporary and paving the way for an acceleration later this year,” said Simon Barry, an economist at Bank of Ireland Plc in Dublin. „The economy still has plenty of momentum, money supply is strong; those considerations remain more important.” The European Commission on Feb. 16 raised its 2007 growth forecast for the euro area and at the same time lowered its inflation outlook to 1.8% from 2.1%. The price of oil price has dropped nearly 20% since the July record of $78.40 a barrel, trading today at $62.01; while the euro has gained 11% in the last 12 months.
ECB policy makers including Nicholas Garganas and Axel Weber continue to suggest the central bank will keep raising its benchmark rate after the increase it has flagged for next week. In addition to the pace of growth, they cite risks to inflation such as union demands for higher wages in Germany, Europe's largest economy, past oil-price increases and money-supply growth, which the ECB uses as a gauge of future inflation. M3 money-supply growth unexpectedly held at a 17-year high in January, the central bank said this week. The ECB has signaled it will increase its key lending rate to 3.75% from 3.5% on March 8, which would be the seventh increase since late 2005. „We have to take interest rates to a level that's appropriate for our base scenario and the economic and monetary risks we've identified,” Weber said in an interview in Frankfurt yesterday. Rates are „still relatively low” and the euro-region economy „is on a solid, stable growth path.”
European government bonds fell today after a separate report showed growth in the manufacturing sector accelerated last month. The yield on the benchmark two-year German note rose 2 basis points to 3.88% by 11.23 a.m. in Brussels. The euro was little changed at $1.3220 against the dollar. The manufacturing report also prompted investors to raise bets that the ECB will increase its benchmark interest rate to 4% by September, futures trading shows. The implied rate on the three-month Euribor futures contract for September rose one basis point to 4.08% today. The February inflation rate is below the 1.9% median forecast in a Bloomberg News survey of economists. The forecasts were based on a provisional January figure of 1.9%; that rate was revised yesterday by the statistics office. (Bloomberg