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Eurozone inflation fall, record jobless point to ECB rate cut

People line up at an employment office in Badalona, near Barcelona, April 25, 2013. REUTERS/Albert Gea
People line up at an employment office in Badalona, near Barcelona, April 25, 2013. REUTERS/Albert Gea

By Robin Emmott

BRUSSELS (Reuters) - Inflation in the euro zone has fallen to a three-year low and unemployment hit a new record, cementing expectations of an interest rate cut by the European Central Bank later this week.

Inflation tumbled to 1.2 percent in April, the lowest level since February 2010 and the biggest monthly drop in more than four years, the EU's statistics office Eurostat said on Tuesday, reflecting an economy mired in recession.

That put the annual rate of increase in the cost of living well below the ECB's target of close to, but below 2 percent, and raises pressure on the central bank to act.

Economists polled by Reuters had expected the inflation rate to edge down to 1.6 percent.

"It's a close call, but we expect a rate cut this week," said Sarah Hewin, a senior economist at Standard Chartered Bank.

"With inflation weaker than expected, unemployment rising yet again and signs of a longer recession, it would be a confidence boost," she said.

Eurostat figures put euro zone unemployment at a record 12.1 percent of the working population in March, calling into question the ECB's forecast that the economy will show signs of recovery in the second half of the year.

According to a Reuters poll last week, a narrow majority of economists expect a 25 basis point cut on Thursday at the ECB's meeting in Bratislava, taking the bank's main refinancing rate to a record low of 0.5 percent.

"Weakness appears to be increasingly spreading to the large core economies, including France and even Germany," said Barclays' economists Philippe Gudin and Thomas Harjes in a research note on the ECB's rate stance entitled "Ready to act".

But a modest rate cut is unlikely to be a game changer.

Spain's economy shrank for the seventh straight quarter in the first three months of the year, figures showed on Tuesday, suggesting its recession will stretch into 2014.

French consumer spending - the driver of its economy - fell in the first quarter having declined for the first time in two decades last year.

And survey evidence has suggested even Germany's economy has struggled early in the year. Figures on Tuesday showed unemployment in Europe's largest economy edged up but consumer morale reached its highest level in more than five years, with the prospect of healthy wage increases buoying sentiment.

Consumers in the GfK survey did turn more pessimistic about the overall economic outlook after three months of improvements.

Euro zone debt prices rose in anticipation of ECB action but traders refrained from putting on big trades before the meeting, denoting a measure of uncertainty.

HUMAN IMPACT

If the ECB feared inflation will fall too far, even flirting with deflation, its mandate would free it up to consider a range of extraordinary policy responses.

But many economists argue that action is also needed by governments to boost growth, after three years of focusing on cutting debt.

Europe's leaders are now rethinking austerity that some economists and politicians say creates a damaging cycle where governments cut back, companies lay off staff, Europeans buy less and young people have little hope of finding a job.

But there is also division on just how far to soften the targets, and while the European Commission will give Spain, France and others more time to reach its budget deficit targets, Berlin and the ECB want to see countries put public accounts on a better footing.

Highlighting the human impact of the debt crisis, some 19.2 million people are now out of work in the bloc, the highest level since the euro zone's inception in 1999 and also since Eurostat began monitoring the group of countries in 1995.

The 17-nation euro zone has little free cash to invest in the economy after a decade of borrowing swelled public accounts to unsustainable levels, but budget cuts are increasingly blamed for holding back a recovery.

(Reporting by Robin Emmott, editing by Rex Merrifield/Mike Peacock)

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