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Tuesday, 14 August, 2001, 14:47 GMT 15:47 UK
Price data sparks Euro rate cut hopes
European Central Bank president Wim Duisenberg
ECB chief Duisenberg: a hawk on inflation so far
Inflation is slowing in four of Europe's biggest countries, paving the way for a possible cut in European interest rates at the end of this month.

In Germany, the weakening economy was put into sharp relief by a drop of 0.8% in wholesale prices between June and July, while the 12-month figure fell to 2.2% in July from 2.1% in June and 4% in May.

France and Spain both reported consumer price figures, with French inflation flat on a 12-month basis from June to July at 2.1% and retail prices in Spain rising 3.9% in the year to July, down from 4.2% in June.

All three are in the eurozone, whose interest rates are controlled by the European Central Bank (ECB) in Frankfurt.

Economists say the inflation news boosts the chances of a rate cut at the ECB's next scheduled meeting at the end of August.

The UK - outside the Eurozone but still significant - also reported slowing inflation, with the annual rate to July 2.2%, down 0.2% from the June figure.

Share boost

The news boosted stock markets across Europe, as dealers welcomed the shortening odds on a cut in rates.

At 1400 GMT, Frankfurt's Dax index was up more than 100 points at 5,558.19, while the Paris Cac 40 index rose nearly 70 points to 4,988.3.

London's FTSE 100 index rose more than 80 points to 5,513.7.

Off target

Inflation in the Eurozone, hovering at about 3%, is well above the 2% figure the ECB is targeting.

The European Central Bank in Frankfurt
ECB: a fortress for high interest rates
The divergence has been a key factor in the reasons given by the ECB for its reluctance to cut rates and boost the flagging economies of European countries.

The ECB has cut rates only once this year, by 0.25% to 4.5% in May.

In contrast, the US Federal Reserve has made six cuts totalling 2.75% since the start of 2001, taking the key federal funds rate to 3.75%.

And the Bank of England has made four quarter-point cuts in the last eight months, dropping the UK's base interest rate to 5%.

ECB caution

The ECB has already signalled that its resistance to cutting interest rates could be weakening in its most recent monthly report, released on 9 August.

The report said the risks to economic growth would remain sizeable during the rest of this year in the 12-nation eurozone, thanks to problems elsewhere in the world economy and weaker than expected economic data in Europe itself.

"Real gross domestic product (GDP) growth in the first half of 2001 is therefore now expected to have been below the levels projected earlier and this has implications for growth estimates for the year a whole," the ECB said.

In all four countries a fall in the cost of oil, as the effect of earlier OPEC petroleum production cuts wore off, played a part in trimming inflation.

In France and the UK, cheaper food was also a contributing factor.

But a note of caution came from Portugal, where inflation hit its highest level for nearly six years.

The rate in the twelve months to July was 4.2%, up 0.1% from a month earlier and rivalling levels last seen in November 1995, as food and leisure prices rose.

See also:

09 Aug 01 | Business
ECB sees 'sizeable' risks to growth
02 Aug 01 | Business
Eurozone rates left unchanged
18 Jul 01 | Business
Eurozone inflation dips
28 Jun 01 | Business
Europe defies calls for rate cut
14 Jun 01 | Business
ECB downgrades European growth
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