Those pointing out the lagging nature of inflation, inflation meaning prices in this case, have called things correctly. In spite of a huge selloff in the Euro, Europe Inflation Rate Drops Most in Almost 20 Years.

Europe’s inflation rate fell by the most in almost two decades and unemployment increased, adding to pressure on the European Central Bank to continue cutting interest rates to battle the recession.

Inflation in the euro area slowed to 2.1 percent in November from 3.2 percent in October, the European Union’s statistics office in Luxembourg said today. The drop is the biggest since at least 1991 and puts the inflation rate at the lowest in more than a year.

The Frankfurt-based ECB has already cut its benchmark rate by 100 basis points in two moves since early October, part of a wave of reductions by central banks around the globe as they combat the worst financial crisis since the Great Depression. The drop this month brings euro-area inflation close to the ECB limit of just under 2 percent, which it has exceeded every month since September 2007.

It “gives the ECB more room to maneuver,” said Christoph Weil, an economist at Commerzbank AG in Frankfurt, who expects a 75 basis-point reduction next week to 2.5 percent. “And the rate cut process will continue.”

Data point “to a further deterioration in economic activity in late 2008,” said Gilles Moec, an economist at Bank of America in London. “Since inflation is also receding faster than anticipated, there is a clear case for a ‘higher-than-usual rate cut’ on Dec. 4 by the ECB.”

Survey Predicts 1/2 Point Cut

An economist survey predicts the ECB to Cut Benchmark Rate 1/2 Point.

The European Central Bank will cut its benchmark lending rate by half a percentage point next week, failing to meet investor expectations of a bigger reduction to tackle the euro-area recession, economists predict.

ECB policy makers, convening in Brussels on Dec. 4, will cut its key rate by 50 basis points to 2.75 percent, the median of 53 economist forecasts in a Bloomberg News survey shows.

Investors are betting the ECB will lower borrowing costs by at least 75 basis points, Eonia forward contracts show, as the inflation rate tumbles at the fastest pace in almost two decades and companies shed jobs. The central bank has reduced its benchmark rate by 1 percentage point, or 100 basis points, in two moves since October, part of a wave of cuts by global central banks to counter the worldwide credit crunch.

“Three 50 basis points cuts in succession is radical by ECB standards,” said Laurent Bilke, an economist at Nomura International Plc in London, who used to work as a forecaster for the ECB. “The governing council follows a policy of gradualism, which means they take their time to make absolutely sure you anchor market and consumer expectations correctly. There’s no doubt that tough medicine is required but don’t expect more than homeopathic doses from the ECB.”

December FOMC Probabilities

In the U.S. the implied probabilities are for the Fed to cut by at least 50 basis points as the following chart shows.

click on chart for sharper image.
Above chart thanks to Cleveland Fed.

The race to Global ZIRP is rapidly advancing.

Mike “Mish” Shedlock
Click Here To Scroll Thru My Recent Post List