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With inflation under control, Euro rates cut forecasted

Tuesday, January 6th 2009 - 20:00 UTC
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The Euro has slipped against the pound and the dollar as expectations rise that the European Central Bank will cut interest rates again on 15 January.

Euro zone inflation figures showed a bigger-than-expected drop while the purchasing managers' index showed a contraction in the service sector. The pound was trading on Tuesday at 1.09530 Euros while the US dollar is at 0.74765 Euros. The ECB has cut rates from 4.25% to 2.5% since October, as inflation has dropped from its July peak of 4%. Cutting interest rates can hurt a currency because investors buy other currencies to seek better returns. The situation with the euro is less clear, however, because UK interest rates are also expected to be cut next week and US rates are effectively zero. Instead, currency strength is reflecting the perceived relative strength of economies and in recent months the Euro zone economy has been seen as less vulnerable to the downturn than those of the UK or US. The EU statistics office Eurostat indicated Tuesday that inflation in the Euro zone fell in December to 1.6%, from November's figure of 2.1%. December's consumer prices figure was well below the European Central Bank's (ECB) target rate of just under 2%. Analysts said that the fall was largely down to the decline in oil prices, compared with the same month in 2007. The Markit Eurozone Purchasing Managers' Index, which polls 2,000 service sector companies, fell to 42.1 in December from 42.5 in November. Any figure below 50 indicates a contraction in the sector.

Categories: Economy, International.

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