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Eurozone retail sales fell for the fourth straight month in annual terms in September, pointing to growing weakness in consumer demand and increasing pressure on the European Central Bank to cut interest rates. Retail sales in the 15-country currency area fell 0.2 percent on the month and 1.6 percent in annual terms, following year-on-year declines in August, July and June, the European Union's statistics office said.
Economists polled by Reuters had expected an even deeper, 0.4 percent month-on-month drop in September and a 2.3 percent annual fall. "While this was a marginally smaller drop than expected, it did little to dilute concerns about the health of consumer spending," said Howard Archer, economist at IHS Global Insight. Retail sales are an indication of household demand, and a drop in private consumption was one of the main reasons for a shrinkage in the eurozone economy in the second quarter.
The European Commission estimates that the economy contracted again in the third, by 0.1 percent, pushing the eurozone into technical recession. Economists put part of the blame for weakening household demand on high inflation, which reached a record peak of 4.0 percent in July. While price growth has since steadily slowed to 3.2 percent year-on-year as of October, chances of a rebound in spending have been diminished by rising unemployment.
With inflation seen back at the ECB's target of just below 2 percent next year, economists expect the central bank to cut rates deeply and quickly to help limit the economic slowdown, brought about by the global financial crisis.
"With inflationary pressures really an issue of the past, the data we got this morning would virtually guarantee a 50 basis point cut from the ECB," said Bank of America economist Matthew Sharratt, referring to the bank's rate meeting on Thursday. A 0.5 percentage point ECB cut would take the cost of borrowing in the eurozone down to 3.25 from 3.75 percent. "We expect further easing in future months to take rates down to 2.5 percent by the second quarter of next year," Sharratt said.

Copyright Reuters, 2008

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