• Home
• /
• Business

Euro zone inflation set to fall to 3.6 percent

LONDON - Euro zone inflation likely fell sharply to 3.6 percent in September thanks to a huge retreat in oil prices, which will be welcome news to policymakers grappling with a historic financial crisis.

Economists now overwhelmingly agree that inflation has likely peaked and will ease markedly going forward as oil prices fall even further, giving scope for the European Central Bank to cut interest rates again to fight off recession.

A Reuters poll of 38 economists showed inflation would be confirmed at 3.6 percent in September when data are released on Wednesday, down from 3.8 percent hit in August. Three banks forecast it to come in lower, at 3.5 percent. And with oil prices sinking fast, the signs are that inflation should ease quickly even if it still holds near double the ECB's ceiling of close to 2.0 percent.

A swirling credit crisis has taken prominence for now over economic data and forced the ECB to act in unison with other central banks to slash interest rates by a half percentage point to 3.75 percent on Wednesday -- just months after it raised them on inflation worries.

"Food and oil prices have both come off and we should see inflation fall quite dramatically next year," said Dario Perkins at ABN Amro. However, he said that the data was very much secondary to wider market moves right now.

Signs that inflation is finally heading south in the euro zone will add to market and economists' conviction that the ECB will lower rates even further.

"The economy is now facing something much worse than just stagnation so inflation concerns have to give way to the more immediate concerns in markets and growth," added Perkins.

Inflation across the euro zone's largest four economies should also show signs that an inflation peak has been reached this year. German inflation is forecast to ease to 2.9 percent from 3.1 percent, while in France its is predicted to hit 3.4 percent, down from 3.5 percent the previous month.

A fall in oil and food prices will likely be the main factors behind the fall in euro zone price pressures last month. Oil fell from around $110 at the start of September to around $100 by month-end.

Falling inflation along with a coordinated rate cut this week has convinced economists more cuts will soon follow.

A separate Reuters poll showed the ECB slicing another 50 basis points off rates this year. The ECB said in its monthly bulletin on Thursday that inflationary risks have decreased further, but it remained imperative to avoid broad-based second-round effects in price and wage-setting.

Yet economists are convinced that the ECB will cut rates regardless of any lingering inflation concerns.

"Our commodity price forecasts and inflation projections have been revised down. The implication is lower rates," said BNP Paribas in a note.