Eurozone inflation up to 1.9 pct in March; sentiment riding high

BRUSSELS – Eurozone inflation rose in March amid upbeat economic sentiment after unemployment fell to new historic lows in February, data showed yesterday, giving the European Central Bank more ammunition in its rate rise drive. European Union statistics office Eurostat estimated that consumer prices in the 13 countries using the euro rose 1.9 percent year-on-year this month, up from 1.8 percent in February and in line with economists’ expectations. The first estimate does not contain a detailed breakdown or monthly data, but economists said the annual rise would entail a 0.6 percent monthly increase, probably fueled by oil prices. The ECB wants to keep inflation just below 2 percent and markets expect it to raise interest rates by 25 basis points to 4.0 percent in June to stem inflationary pressures from fast credit growth and a tightening labor market. Eurostat said seasonally adjusted unemployment fell to 7.3 percent in February, the lowest since records began in the early 1990s, from 7.4 percent in January. The drop was mainly thanks to a 0.5 percentage point drop to 7.1 percent in the jobless rate in the biggest eurozone economy, Germany. In a further indication that the eurozone economy was firing on all cylinders, economic sentiment surprised on the upside, rising to six-year highs. «Falling unemployment is boosting consumer confidence and spending, and proving a much firmer underlay for sustainable growth in the next few years,» said David Brown, Chief European Economist at Bear Stearns International. «On the strength of these trends, the ECB should feel much more confident about taking rates higher in the next few months,» he said. A monthly European Commission survey showed economic sentiment (ESI) rose to 111.2 points in March from 109.7 in February, beating market expectations of a decline to 109.5. The rise, which brings the indicator closer to its all-time high of 117.4 at the peak of the dot. com boom in May 2000, was mainly thanks to better sentiment in services, but also in retail trade as well as manufacturing and among consumers. «The ECB will see the renewed rise in the ESI as justification for its optimistic economic output, and we expect it to raise the key interest rate by 25 basis points to 4 percent in June,» said Christoph Weil, economist at Commerzbank. ECB policymakers this week have struck a hawkish tone, underlining that growth is healthy and rates at 3.75 percent remain «accommodative» – wording that investors understand means rates are likely to rise at least once more. The bank, which expects inflation to stay below its target this year but rebound next year, also looks at inflation expectations. These, according to the Commission survey, showed consumer inflation expectations over the next 12 months fell to 18 points from 20 in February, and well below the long-term average of 23. In the manufacturing industry, meanwhile, selling price expectations rose to 13 points in March from 12 in February, versus the long-term average of 6. The overall consumer confidence index improved 1 point to -4 in March as households grew more optimistic about their finances and the general economic situation. Their unemployment expectations were unchanged. Hiring expectations in the manufacturing sector, where confidence rose to 6 points from 5, gained to 2 points in March from 1 in February and were close to all-time highs of 4 from late 2000, mainly thanks to jumps in Germany, Spain and Ireland. But expectations of hiring in the services sector fell to 12 points from 14.

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