Rate hike in April on cards after rapid rise in EU inflation
EUROPEAN inflation unexpectedly accelerated to the fastest in more than two years in March as European Central Bank policy-makers prepared to raise interest rates to fight increasing price pressures.
Inflation in the 17-nation euro region quickened to 2.6pc from 2.4pc in February, the European Union's statistics office said. That's the fastest since October 2008 and exceeds the ECB's 2pc limit for a fourth month. Economists forecast inflation to hold at 2.4pc.
ECB president Jean-Claude Trichet earlier this month called for "strong vigilance" on price increases, signalling that the bank may raise its benchmark interest rate in April from a record low of 1pc.
The German economy, Europe's largest, has driven the region's expansion as companies boosted hiring and output, helping offset the impact of surging energy costs and tougher austerity measures in countries such as Spain.
"April is a done deal for the ECB and this release adds to that view," said Nick Kounis, chief European economist at ABN Amro Bank in Amsterdam.
"Beyond April, there will be a gradual pace of rate hikes. Headline inflation is going to be comfortably above 2pc for the whole of this year."
The euro gained against the dollar after the report, trading up 0.6pc on the day.
Crude oil prices have surged 15pc this year as output from Libya slumped. An armed conflict between Libyan leader Muammar Gaddafi's troops and rebel forces has forced companies, including Total and ConocoPhillips, to suspend operations and evacuate staff.
Deutsche Bank yesterday raised its crude forecast for this year by 16pc to $117.50 a barrel, citing declining spare capacity in Saudi Arabia and unrest in the Middle East.
Coffee, sugar and cocoa prices will rise as much as 10-fold by 2014 because of shortages, Aaron Smith, managing director of Superfund USA said in London. Smith correctly predicted record copper prices in November.
That puts additional pressure on companies to pass on higher costs to protect earnings as labour unions seek higher wages. Germany's BMW said on March 15 that higher raw-material costs will weigh on earnings this year.
The euro-region economy is already showing some signs of cooling. European economic confidence worsened in March, with both manufacturers and consumers forecasting rising prices over the coming 12 months. Services and manufacturing growth weakened this month and German investor confidence fell. (© Bloomberg)