Eurozone inflation has soared to its highest level for almost 16 years, data published yesterday showed, creating a fresh dilemma for the European Central Bank (ECB) as it pumps extra overnight funds into money markets.
The rise 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, despite slowing economic growth. The central bank aims to keep inflation "below but close" to 2 per cent.
The data emerged after sterling fell to a record low of 79.82p against the euro as UK house prices were shown to have slipped for a sixth month in March. Traders now expect the Bank of England to cut interest rates next week. "We see further downside to the pound," said Paul Robinson, a currency strategist at Barclays in London and a former Bank of England economist.
"The key threat to the UK economy is that the housing sector and companies are finding credit much more difficult to come by."
The ECB said it had injected €15 billion into eurozone overnight financial markets to ease tensions at the end of the quarter.
The ECB has drawn a distinction between operations aimed at easing money-market tensions and its main interest rate policy, which is calibrated to fight inflation. But its task has been complicated by confusing signals about the impact of world financial turmoil on the real eurozone economy - and hence on inflation trends in the 15-country region.
The ECB's argument that there has been no credit crunch has been bolstered 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 euro's 1999 launch, ECB figures show.
The central bank dismisses arguments that such data have been distorted by the financial turmoil.
If correct, this suggests that businesses are continuing to invest in expansion, which should support growth. This is likely to strengthen the ECB's conviction that even if eurozone growth has slowed as a result of the euro's strength, interest rate rises and fears about the US outlook, no big downturn is looming.
(Bloomberg)
