Eurozone’s Inflation Slows down but Remains Headache for ECB

Inflation in the 17 countries that use the euro fell to an annual 2.6pc in April, but was still higher than analysts’ expectations and presents a continuing headache for the European Central Bank.

The figure fell from 2.7pc in March, but remained above the 2.5pc average forecast.

Inflation has remained stuck well above the European Central Bank’s goal of just under 2pc, a target that it now says won’t be reached until early 2013.

The ECB says the rate remains high because of higher oil prices and taxes in some countries and not because of inflationary pressures from the economy.

The stubborn inflation rate is important to the euro zone debt crisis because it discourages the ECB bank from cutting its 1pc benchmark interest rate.

Lower rates can spur growth, but can worsen inflation.

ECB President Mario Draghi has stressed that the bank will remain faithful to its mandate under the European Union treaty of fighting inflation as its first priority.

Lack of flexibility on interest rates could become more of an issue as worries increase about the depth of the eurozone’s economic downturn.

The economy of the 17-country group that uses the euro shrank 0.3pc in the fourth quarter of last year.

Recent economic indicators – such as a disappointing survey of purchasing managers showing lower economic activity – have raised fears the dip may be deeper.

European Central Bank data Monday added another downbeat note, as loans to the private sector rose by just 0.6pc in March, another sign of weak economic activity, as AFP stated.

The ECB has said that its €1 trillion injection of emergency loans to commercial banks in December and February have improved financial institutions access to funding – but that businesses are not asking for loans because of shaky economic prospects.