German inflation plunge paves way for ECB rate cut

Inflation in the eurozone’s dominant economy sank to 0.6%

An unexpected slump in German inflation has set the scene for a host of radical monetary stimulus measures by the European Central Bank this week.

Inflation in the eurozone’s dominant economy sank to 0.6 per cent in May, down from 1.1 per cent in April, Germany’s Federal Statistics Office reported yesterday.

The figure was well below economists’ expectations of 1 per cent and represents the lowest rate recorded in Germany since February 2010.

“If the ECB needed one more reason to act, they’ve now received it on a silver platter” said Jens Kramer, an economist at Hanover’s Norddeutsche Landesbank. The news helped to send the euro down 0.22 per cent against the dollar to $1.3605.

The inflation figures from the rest of the eurozone states are due to be published today. In April the inflation rate across the bloc came in at 0.7 per cent, well below the ECB’s target of around 2 per cent.

The Frankfurt-based central bank has come under pressure to take action to avert the danger of deflation in the single-currency bloc.

Economists now expect ECB President Mario Draghi to announce a further cut in its main interest rate on Thursday to 0.1 per cent as well as introducing a negative deposit rate for banks. This will effectively charge lenders for keeping reserves at the central bank,  with the goal of boosting credit to the wider economy.

The eurozone is still struggling to grow after emerging from recession last year. Surveys of manufacturing activity by Markit yesterday showed May growth slowed in all countries except the Netherlands.

But UK manufacturing is growing at its healthiest pace in more than two decades, fuelling hopes the long-awaited rebalancing of the economy could finally be materialising.

The latest snapshot of the sector by Markit/CIPS gave a reading of 57 in May, well above the 50 mark that signals growth. The reading was slightly down from the 57.3 recorded in April, but economists at Markit/CIPS stressed firms are enjoying their best spell of growth since the survey began 22 years ago, with output expanding in every months since March 2013.

“Sustaining the rebound and continuing to push towards rebalancing the economy towards manufacturing remains critical,” said Rob Dobson of Markit. David Noble, CIPS chief executive, said: “We’re starting to see real evidence of a sustained recovery for the sector.”

According to the Office for National Statistics, manufacturing output expanded by 1.3 per cent in the first three months and activity was up  3.5 per cent over the same quarter a year earlier. However, the sector’s output still remains 7.7 per cent below its level at the beginning of the recession in 2008. Mr Dobson said even at the present rate of growth it would take until late-2015 to achieve “full recovery”.

In a further tentative sign of UK rebalancing, mortgage activity fell for a third successive month in April. There were 62,915 approvals for house purchases in the month, according to the Bank of England, below the consensus estimate of 64,500 and down from a peak of 75,838 in January. The approvals rate is the lowest since July 2013.

Samuel Tombs of Capital Economics said: “While recent falls may reflect temporary disruption caused by lenders adopting the Mortgage Market Review regulations which were introduced in mid-April, surveys such as the RICS Housing Market Survey have suggested for several months now that demand is fading.”

House prices rose 10.9 per cent year on year in April, according to Nationwide, fuelling fears of a bubble. There have been growing demands for the Bank’s Financial Policy Committee to recommend a watering down of the Government’s Help to Buy mortgage subsidy scheme at its meeting later this month. But the latest signs of  moderation in lending may ease the pressure on regulators to take further action to cool the housing market.

The total value of mortgage lending in April was £15.7bn, of which £10bn was for house purchases and £5.1bn was for remortgaging. Consumer credit rose by £700m in the month, an annual growth rate of 5.3 per cent.

The manufacturing picture was strong across the board in May with output and new orders growing in consumer, intermediate and investment goods. New export orders were up again, with demand increasing from the United States, the Middle East and New Zealand. Employment also rose for the thirteenth successive month.

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