The financial markets are more and more expecting an interest rate cut by the European Central Bank at their meeting this week as inflation in the eurozone fell to a three-year low in April and unemployment hit a new record.
Cutting interest rates would show investors the ECB is concerned about the poor state of the region’s economy.
In April the rate of increase in the cost of living was up 1.2 percent compared with the same month last year.
That means it was well below the ECB’s target of close to, but below 2.0 percent, raising pressure on the central bank to act to aid growth.
According to a poll of economists carried out last week by Reuters, a narrow majority of them expect a 0.25 percent interest rate cut on Thursday at the ECB’s monthly policy meeting in Bratislava.
That would take the bank’s benchmark rate to a record low of 0.5 percent.
“It’s a close call, but we expect a rate cut this week,” said Sarah Hewin, a senior economist at Standard Chartered Bank.
“With inflation weaker than expected, unemployment rising yet again and signs of a longer recession, it would be a confidence boost,” she said.
Low inflation reflects an economy stuck in recession, as do the latest eurozone unemployment numbers.
In March 19.2 million people were without jobs – the highest level since the eurozone’s creation in 1999.
The overal total is 12.1 percent of the workforce – while nearly one in four young Europeans are unemployed.
The grim total calls into question the ECB’s forecast that the economy will show signs of recovery in the second half of the year.
Increasing numbers of economists and politicians are complaining that austerity creates a damaging cycle where governments cut back, companies lay off staff, Europeans buy less and young people have little hope of finding employment.
But a modest interest rate cut is unlikely to be a game-changer.
Borrowing costs are already low, if you fear losing your job, you are not likely to borrow, and banks are in any case reluctant to lend to indebted households and to companies struggling to sell their goods.