Europe Producer-Price Growth Slows More Than Forecast

By Fergal O'Brien

Nov. 4 (Bloomberg) -- European producer-price growth slowed more than economists forecast in September as oil prices plunged from their all-time high earlier this year.

Producer prices in the 15 euro nations rose 7.9 percent from a year earlier after increasing 8.5 percent in August, the European Union statistics office in Luxembourg said today. Economists forecast that producer-price inflation would slow to 8 percent, based on the median of 23 estimates in a Bloomberg News survey.

Easing inflation pressure is giving the European Central Bank space to cut interest rates as policy makers across the globe seek to limit the economic damage from the credit crisis. The Frankfurt-based ECB this week will probably cut its key rate by half a percentage point for the second time in a month and follow that with another reduction in December, a survey of economists shows.

``The upshot of all this is that with factory-gate prices continuing to ease and only pointing to modest further rises in core consumer-price inflation, the ECB will not hesitate to cut interest rates sharply over the next year or so,'' said Ben May, an economist at Capital Economics in London. The rate ``may eventually reach 1.5 percent by the end of next year,'' compared with 3.75 percent currently.

Crude oil reached a record $147.27 a barrel in July, which pushed producer-price inflation to 9.2 percent in August, the highest since the data series began in 1990. Oil has since dropped almost 60 percent to around $65.

Energy Prices

Energy-price inflation eased to 20.3 percent in September from 22.6 percent in August. From the previous month, energy prices dropped 0.9 percent, while overall prices slipped 0.2 percent. The core rate of inflation, which excludes energy, slipped to 4.8 percent from 4.9 percent.

European government bonds rose today. The yield on the two- year note, which is most sensitive to the outlook for rates, dropped 5 basis points to 2.48 percent by 12:34 p.m. in London. The yield on the 10-year German bund, Europe's benchmark government security, slipped 2 basis points to 3.81 percent.

The euro rose 0.9 percent to $1.2754 against the dollar. It earlier fell to $1.2527, the lowest since Oct. 28.

The European Commission said in a report yesterday that euro-area economic growth will slump to 0.1 percent in 2009, the worst performance since 1993. It also estimated that gross domestic product will shrink for three consecutive quarters this year and cut its forecast for full-year 2008 growth to 1.2 percent.

Data published last week showed that consumer-price inflation in the euro area eased to 3.2 percent in October from 3.6 percent in September. The ECB, which aims to keep inflation just below 2 percent, holds its next governing council meeting on Nov. 6. A half-point cut at the meeting would reduce its benchmark rate to 3.25 percent.

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.