Eurozone inflation unchanged at 2.4 pct

[June 29, 2012]  FRANKFURT, Germany (AP) -- Inflation in the 17 countries that use the euro was an annual 2.4 percent in June, a figure that leaves the door open for a possible interest rate cut by the European Central Bank.

The figure was the same as in May and matched average market expectations.

Inflation has been gradually sinking in the eurozone thanks to a slack economy and lower oil prices, and the ECB expects it to fall to 2 percent sometime next year. Mario Draghi, the head of the European Central Bank, said June 15 that there was no threat of inflation in any eurozone country.

That was a telling remark because the bank's chief job is to keep inflation under control. Lower rates can stimulate growth but can worsen inflation, meaning the bank can only cut its benchmark refinancing rate if it can argue that inflation is under control.

Draghi's stance thus left the door open for a potential interest rate cut when the bank's governing council meets next week. A weakening eurozone economy puts pressure on the bank to cut to support growth and aid the eurozone in digging out of its crisis over too much government debt. The European Union's executive commission predicts the eurozone will shrink by a relatively mild 0.3 percent this year, and recent data have suggested the downturn could turn out worse.

Analyst Christoph Weil at Commerzbank said that there was "no obstacle to an ECB rate cut from the side of inflation." Inflation risks remained low because companies are finding it difficult to raise prices because of weak demand for their products. Commerzbank thinks the bank will cut the refinancing rate to 0.75 percent from its current 1.0 percent at next week's rate meeting.

The refinancing rate is what banks pay when they borrow from the ECB. It influences other interest rates that affect the cost of borrowing for banks, companies and consumers.

[Associated Press]

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