Euro-area inflation slowed less than economists forecast in March as steeper price increases for services offset an easing in energy costs.
Annual price growth in the 17-nation economy was 1.7 percent, down from 1.8 percent in February, the European Union’s statistics office in Luxembourg said today. That compares with the 1.6 percent median of 44 economists’ estimates in a Bloomberg News survey. The inflation rate moved below the European Central Bank’s 2 percent ceiling in February for the first time in more than two years.
The ECB’s Governing Council meets tomorrow to decide on interest rates after a month in which euro-area leaders fumbled a bailout of Cyprus and the euro fell to its lowest level of the year against the dollar. ECB President Mario Draghi said on March 7 that underlying price pressures remain contained, with an average inflation rate of about 1.6 percent forecast for this year given the weak economy.
“On paper, you could say there’s room for an interest-rate cut,” said Thilo Heidrich, an economist at Deutsche Postbank AG (DPB) in Bonn. “On the other hand, you could say that would achieve nothing and would only use up some ammunition in case the debt crisis really worsens.”
The ECB probably will maintain its benchmark rate at a record low 0.75 percent at tomorrow’s meeting in Frankfurt, according to the median of 56 economist estimates in a Bloomberg survey. The central bank has held its key rate at that level since July and just two of the economists polled forecast a cut this time.
Energy prices increased an annual 1.7 percent in March after a 3.9 percent gain a month earlier, today’s report showed. Prices of food, alcohol and tobacco rose 2.7 percent, the same as in February, while the cost of services increased 1.9 percent after a 1.5 percent gain in the prior month.
In the U.K., the British Retail Consortium said its measure of shop-price inflation accelerated to 1.4 percent in March. It also said the impact of the pound’s weakness is beginning to be felt on import prices.
Separately, U.K. construction contracted for a fifth month in March as the industry suffered from bad weather and poor demand, Markit Economics said. An index of activity was at 47.2 in March compared with 46.8 in February, missing the median economist forecast of 48.
The Bank of England said in a survey today that lenders increased the availability of mortgages in the first quarter and expect a further improvement this quarter. BOE policy makers, who are trying to encourage banks to increase lending, begin their monthly two-day meeting today and will keep their bond- purchase goal unchanged, according to the median of 37 economists in a Bloomberg survey. Three economists predict a 25 billion-pound increase.
The sovereign-debt crisis flared up again last month after euro-area finance ministers decided to impose losses on depositors at Cypriot banks in exchange for a 10 billion-euro ($12.8 billion) aid package. Michael Sarris yesterday resigned as Cyprus’s finance chief after helping clinch the final terms of the bailout, which includes the imposition of losses on uninsured depositors at the nation’s two biggest banks.
The euro was unchanged against the U.S. dollar, trading at $1.2820 at 12:45 p.m. in Brussels, after being down as much as 0.2 percent earlier. The pound was little changed against the euro and the dollar, after falling earlier to a two-week low against the dollar.
Concerns about the bailout for Cyprus last week had helped push the euro below $1.28 for the first time in four months. The single currency traded as low as $1.2751 on March 27, the lowest since Nov. 21, before rebounding. The euro had weakened in the past two days amid speculation that the ECB will use its meeting tomorrow to signal the likelihood of future economic stimulus.
The central bank cut its economic outlook last month, predicting a contraction of 0.5 percent for the euro area this year and growth of 1 percent in 2014. Draghi repeated the scenario that growth would eventually return to Europe’s economy in the second half of this year.
Still, hard evidence that a recovery is building is scarce. Euro-area services and manufacturing output contracted the most in four months in March and a gauge of economic confidence decreased more than economists forecast. Unemployment rose to an all-time high of 12 percent in February, with a record 19.1 million people out of work, up 33,000 from the prior month.
As Europe struggles to emerge from the recession, manufacturers are relying on faster-growing markets to maintain revenues. Schaeffler AG, the industrial-bearing maker that is the biggest investor in car-parts producer Continental AG (CON), said on March 21 that demand in North America and Asia will more than make up for a drop in Europe to allow sales growth in 2013.
The euro-zone economy has contracted for five straight quarters and that trend is forecast to continue in the first three months of this year, according to a separate Bloomberg survey of economists. The ECB’s Draghi may face more pressure to act to foster a recovery, said Christian Schulz, senior European economist at Berenberg Bank in London.
“The euro-zone economic confidence recovery has stalled, renewed financial-market tensions are, and will be, a drag,” Schulz said. “The delayed recovery means that a rate hike is unlikely before the second quarter of 2014.”
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