European inflation slowed in December, giving the European Central Bank room to lower borrowing costs further to shore up the economy.
The inflation rate in the 17-nation euro area fell to 2.8 per cent from 3 per cent in November, the European Union's statistics office in Luxembourg said in an initial estimate yesterday. That's in line with the median of 27 economists' estimates in a Bloomberg News survey.
Europe's economy is edging towards a recession, adding pressure on companies to lower prices to bolster consumer demand. ECB President Mario Draghi on December 8 called risks to the price outlook "broadly balanced", after cutting the benchmark interest rate for a second time in as many months.
"In terms of general economic environment, it's hard to see any strong price pressures coming from the domestic side," said Nick Matthews, an economist at Royal Bank of Scotland Plc in London. "We may see euro-region inflation a lot closer to 2 per cent by the end of the first quarter."
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Euro-region inflation may average 2 per cent this year and 1.5 per cent in 2013, the ECB said on December 8. In 2011, consumer prices probably increased 2.7 per cent on average, it estimated.
While crude oil prices have increased 11 per cent over the past year, companies may find it difficult to pass on higher costs as governments toughen austerity measures and the economy cools. Euro-region unemployment rose to 10.3 per cent in October, the highest in more than a decade, and consumer confidence fell to the lowest in more than two years last month.
Euro-region economic confidence probably dropped to the lowest in more than two years in December, according to a Bloomberg survey. The European Commission will release the report measuring confidence of households, builders and manufacturers tomorrow.
L'Oreal SA said on Nov-ember 7 that Portugal, Italy, Greece and Spain held back growth in the third quarter, leaving the Paris-based company "cautious" for the rest of 2011. The situation remains "difficult in southern Europe," Chief Executive Officer Jean- Paul Agon said in a statement.
While the ECB was forced to reverse last year's two rate increases, expand provisions of unlimited cash to banks and widen the pool of collateral to secure the funds, it has rejected stepping up purchases of government bonds. Draghi has said it's up to governments to restore confidence.
ECB council members will hold their next rate meeting on January 12 in Frankfurt. They had voted to cut interest rates at the previous two meetings by 25 basis points, bringing the benchmark to 1 per cent, matching a record low.
"There is a decent chance of another cut, to 0.75 per cent, even if it does not come" next week, said Steven Barrow, head of Group of 10 currency strategy at Standard Bank in London.
Finance: Banks to get $25.5B loans
The European Central Bank said it will lend $25.5 billion (Dh93.64 billion) over three months to euro-area banks to ease tensions in money markets. The Frankfurt-based central bank said it will provide the funds to 34 banks at a fixed rate of 0.58 per cent. Last month, banks borrowed $50.7 billion in three-month funds. The ECB will also lend 12 banks $6.2 billion in its regular weekly dollar operation. The ECB doesn't disclose the identity of banks it lends to.
Demand for dollars from European banks surged last month after the ECB coordinated with the Federal Reserve to halve the cost of borrowing in the currency, as part of a global effort to mitigate a credit shortage worsened by the euro region's sovereign debt crisis. European banks need dollars to fund their own lending in the US as well as to their clients.