Euro zone inflation jumped to new highs in March, data showed today, 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 per cent year-on-year in March from 3.3 per cent in February, European Union statistics office said -- even further away from the European Central Bank's target just below 2 per cent.
Separately, European Commission data showed economic sentiment in the euro zone 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 per cent. 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 per cent 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.