Eurozone inflation jump bolsters rate hike view

[March 31, 2011]  LONDON (AP) -- Inflation in the 17 euro countries spiked to the highest level in nearly two and a half years in March, official figures showed Thursday -- cementing market expectations that the European Central Bank will hike interest rates next week.

Eurostat, the EU's statistics office, said consumer prices in the eurozone were 2.6 percent higher in March than the year before. That's the highest rate since October 2008 and is way above the central bank's target of keeping inflation at "close to, but below 2 percent."

The increase was not anticipated -- the consensus in the markets was for inflation to remain at 2.4 percent.

As this was Eurostat's "flash" estimate for inflation, it provided no details as to why inflation rose. Those will emerge in April, though economists expect rising energy and food costs to be behind the increase.

Over the past month, comments from the European Central Bank have been increasingly hawkish on inflation. The bank's rate-setters, including the president Jean-Claude Trichet, have been giving heavy hints that the main interest rate will rise from the current record low of 1 percent at the next meeting on April 7.

Michael Hewson, market analyst at CMC Markets, said the key now will be how hawkish Trichet is in the aftermath of next week's "increasingly likely" rate hike and in particular whether he will reiterate his call for "strong vigilance." Throughout his presidency, that's been code for a likely rate rise in the following month.

Mounting expectations that borrowing costs in the eurozone are on their way up have helped support the euro currency over the past few weeks. Following the data's release, the euro was trading 0.8 percent higher on the day at $1.4228.

Interest rate increases, or the presumption of interest rate increases, benefit the euro if other central banks don't do the same. The U.S. Federal Reserve, for example, is not expected to raise its super-low interest rates until the latter part of this year while the Bank of England's rate-setting committee is fretting about the impact of higher borrowing costs on the fragile British economy.

"As far as the single currency is concerned it continues to benefit from yield differentials as markets factor in multiple rate hikes throughout 2011, while other central banks like the Bank of England and the Federal Reserve fret about the effect any planned rise in rates could have on consumer spending and growth," Hewson said.

"It would appear that the ECB has no such worries about that, and seems determined to try and put the inflation genie back in the bottle."

[Associated Press; By PAN PYLAS]

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