Euro Session: What to Expect

The final revision of the Euro Zone Consumer Price Index is expected to confirm the annual inflation rate slowed to 0.6% in the year to March, the lowest since the introduction of the Euro. A survey of economists conducted by Bloomberg suggests deepening recession will see the currency bloc’s economy will shrink by a full -3.0% this year, threatening to put inflation into negative territory. Despite the dour outlook, the European Central Bank cut interest rates less than economists expected earlier this month, although bank president Trichet did say that rates had not reached “the lowest limit” and revealed that “the Governing Council intends to decide on further non-standard measures at our next monetary policy meeting”.

Tumbling inflation is also to be noted in Switzerland where Producer and Import Prices are expected to shrink at annual pace of -2.4% in March. The reading suggests continued downward pressure on consumer prices (the headline inflation gauge) after CPI slipped into negative territory for the first time in 5 years to print at -0.4% in the year to March. Weakening domestic conditions will add to external downward pressure on price growth: a survey of economists conducted by Bloomberg suggests that the economy will shrink -2.5% this year, the most since 1975, threatening to entrench deflation expectations. This stands to commit the mountain nation to a long-term stagnation as consumers and businesses perpetually put off spending and investment to wait for the best possible bargain. Although the central bank had previously committed to a very aggressively dovish stance including quantitative easing and currency market intervention, the latter part of the plan may now be off the table considering commitments made at the recent G20 summit in London.