Falling euro zone factory prices may force ECB move

BRUSSELS (Reuters) - Euro zone factory prices fell more than expected in June as the cost of energy continued to fall and kept the European Central Bank's options open for a further rate cut later this year to try to pull the economy out of recession.

Prices at factory gates in the 17 countries using the euro slid 0.5 percent for the second month running, the EU's statistics office Eurostat said on Thursday, compared to a consensus expectation of -0.4 percent among economists polled by Reuters.

The ECB cut rates to a record low of 0.75 percent in early July and the bank's Governing Council gathered on Thursday for its August meeting, but it is not expected to cut rates for the time being.

A Reuters poll showed that economists expect another rate cut before the end of the year, but only seven out of 70 expected it this month.

"With more negative news on the economy... we expect the ECB to cut the refi rate to 0.5 percent in the third quarter, probably in September," Citibank wrote in a note to clients late last month, referring to the refinancing, or interest, rate.

Investors are expecting the bank to go well beyond a rate cut after ECB President Mario Draghi said last week the bank was "ready to do whatever it takes to preserve the euro". But it is unclear what, if any, new steps will be announced to help bring down rising Italian and Spanish borrowing costs.

A revival of ECB bond purchases was seen as the most likely option in a Reuters poll of money-market traders.

Inflation, at least, is not an issue for the short term, with Brent crude falling from $120 a barrel earlier this year, and consumer inflation at 2.4 percent in July, steady at the same level seen in May and June.

Energy costs for industry fell for the third straight month in June, by 1.8 percent, while the only two areas in Eurostat's index to show any price rises from May were capital goods, mainly machinery, and non-durable consumer goods, which include cosmetics and cleaning products.

Back in June, the International Monetary Fund urged the ECB to cut rates, but it is unclear if further reductions in the cost of borrowing for companies and households will do much to revive the euro zone's economy.

With one in 10 workers out of a job and the bloc's economy expected to contract by at least 0.3 percent this year, a return in business and consumer confidence is what the single currency area needs, economists say.

(Reporting by Robin Emmott; editing by Rex Merrifield)

Source: http://news.yahoo.com/falling-euro-zone-factory-prices-may-force-ecb-092116519--business.html

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