Eurozone Inflation Surges to 16-year High


Eurozone inflation has soared to the highest level for almost 16 years, data published on Monday showed, creating a fresh dilemma for the European Central Bank as it again pumps in extra overnight funds in money markets.

The pick-up in inflation, from 3.3 per cent in February to 3.5 per cent in March, all but rules out any cut in ECB interest rates in the near future, even as economic growth slows. The Frankfurt-based institution aims to keep inflation below but close” to 2 per cent.

At the same time, the ECB announced it had injected €15bn into eurozone overnight money markets to ease tensions at the end of the quarter.

The ECB has so far drawn a clear distinction between operations aimed at easing financial market tensions and its main interest rate policy, which is calibrated to combat inflation.

But its task has been complicated further by confusing signals about the impact of the global financial turmoil on the real eurozone economy – and hence on inflation trends in the 15-country region.

The ECB’s argument that there is been no credit crunch” has been strengthened by data showing eurozone lending to business accelerating and expanding at record rates. Lending to non-financial corporations” grew at an annual rate of 14.8 per cent in February – the highest since the launch of the euro in 1999, according to ECB figures.

The central bank dismisses arguments that such data have been distorted by the financial turmoil – as a result, for instance, of banks facing difficulties in selling-on loans and removing them from their balance sheets.

If correct, that suggests businesses continue to invest in expansion plans, which should support economic growth.

In turn, that is likely to strengthen the ECB’s conviction that even if eurozone economic growth has slowed in recent quarters – as a result of the euro’s record strength, interest rate rises since 2005 and fears about the US economic outlook – no dramatic downturn is looming. Its upbeat outlook has discouraged financial markets from pricing in interest rate cuts before June at the earliest, despite sweeping cuts in the US.

Analysts warned that view could soon change, however. The European Commission reported that its eurozone economic sentiment” indicator had fallen in March below its long-term average, pointing to a further significant deceleration in economic growth. At 99.6 in March, down from 100.2 in February, the indicator is at its lowest level since November 2005.

However, stark regional differences have emerged. In Spain, which has been hit by fears of a housing market collapse, the economic sentiment indicator fell in March to the lowest level since January 1994. But Germany reported an increase in optimism in the same month, while sentiment in France remained unchanged.


TradingEconomics.com, Bloomberg
3/31/2008 7:14:36 AM