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Rates will rise next week as euro inflation climbs: analysts

31 March 2011, 12:10 CET
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(BRUSSELS) - Inflation surged across the debt-ravaged eurozone in March, official data showed Thursday, raising the prospect of the first interest rate hike by the European Central Bank for two years.

The annual rate of inflation across the eurozone accelerated to 2.6 percent in March, the EU's Eurostat agency said as fears mount among economists that rising prices could put a brake on European economic growth.

The news "effectively rubber stamps an ECB interest rate hike from 1.00 percent to 1.25 percent at its April 7 meeting," said London-based IHS Global Insight specialist Howard Archer.

Up from 2.4 percent in February, the rate is now significantly above the ECB's hopes for medium-term inflation at below two percent across the 17-nation currency area.

March marks the fourth successive month above that target.

And after the rate "rose more than expected as it reached a 29-month high," central bank policymakers will be forced to act to prevent the spike in oil prices at a time of military conflict in Libya feeding through the prices on Main Street, Archer explained.

"The ECB is determined to send out the message that it will be tough on inflation despite the still difficult economic situations in many eurozone countries and the global economic uncertainties resulting from events in Japan and the Middle East and North Africa," he said.

A rates rise "is warranted to try to contain households' inflation expectations and companies' pricing expectations," he underlined.

The March rate for the eurozone is the highest since October 2008, when it hit 3.2 percent.

A year ago the rate was 0.8 percent.

Archer said to expect a second interest rate rise of the same level in the second half of 2011, taking it up to 1.50 percent.

"However, we acknowledge that further rises in inflation in the near term could prompt the ECB to act more aggressively than this."

Other analysts anticipated a softer landing with current momentum petering out.

"We expect eurozone inflation to pick up further throughout the summer, before starting to decline at the turn of the year," said Chiara Corsa of Milan-based UniCredit.

"We see the headline averaging 2.6 percent in 2011 and 2.0 percent next year."

London-based Daniele Antonucci of Morgan Stanley Research also felt that while inflation is "unlikely to be a short-lived theme in the euro area," it was "likely to have peaked this month."

That, though, depends to a large extent on the "gyrations of commodity prices and exchange rates."


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