Record eurozone CPI rules out quick ECB rate cut

Eurozone inflation jumped to new highs in March, data showed on Monday, effectively ruling out any near-term ECB rate cuts as price stability turned out to be a bigger headache than slowing economic growth.
Inflation in the 15 countries using the euro accelerated to 3.5 percent year-on-year in March from 3.3 percent in February, European Union statistics office said - even further away from the European Central Bank's target just below 2 percent.
Separately, European Commission data showed economic sentiment in the eurozone fell to 99.6 from 100.2, the lowest reading since November 2005, signalling a sharp slow down in growth in the first half of this year, economists said.
They also said the weak sentiment meant the ECB would have to cut its 2008 growth forecast, now in a range of 1.3 and 2.1 percent. But inflation would be the bigger worry for the bank. "Today's evidence clearly plays in favour of the current ECB stance, since the GDP slowdown is not as pronounced as the inflation acceleration," said Aurelio Maccario, economist at UniCredit Markets & Investment Banking.
"Rate cuts are not in the agenda and won't be for some time... inflation has probably peaked, but will remain above 3 percent for a large part of 2008," he said.
The inflation data briefly boosted the euro against the dollar as it strengthened expectations the ECB would not cut rates soon in support of the faltering growth, while borrowing costs in the United States are still expected to ease. The ECB has been expecting a temporary "hump" in prices, but it is likely to worry that record inflation could trigger wage rises and price hikes to compensate for the rising oil and food prices that are likely to have been behind the March jump.
"I think the flash estimate for eurozone inflation probably confirms the worst European Central Bank fears," said Matthew Sharratt, economist at Bank of America.
"Certainly...this inflation data is of huge concern. It seems to suggest that there is not going to be a meaningful rate cut debate over the next couple of months," he said. The European Commission also said the inflation data was "not good" although not that surprising given the surge in oil prices in March to a record of $111.8 per barrel.
The ECB believes that to achieve its inflation target, it needs to anchor inflation expectations at a low level, and has therefore been playing down expectations of a near-term rate cut from the current 4.0 percent, despite signs of slowing growth.
A monthly European Commission survey showed that the strategy could be working as, for the first time in five months, consumer inflation expectations eased - to 26 points from 28.
Also selling price expectations among producers fell to 13 points from 14, down for the first time in six months. The Commission data also showed that the decline in sentiment in March was driven mainly by the construction sector and services, which generate more than two thirds of the eurozone's gross domestic product. Consumer optimism was unchanged at -12 points, retail was unchanged at 1 point and industry was unchanged at 0 points.
But a business climate indicator unexpectedly rebounded in March from two-year lows, pointing to sustained industrial production growth in the first quarter, the Commission said.