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EU flags fly at the European Commission headquarters in Brussels. (Yves Logghe/Yves Logghe/AP)
EU flags fly at the European Commission headquarters in Brussels. (Yves Logghe/Yves Logghe/AP)

Euro zone inflation cools, but still above expectations Add to ...

Inflation pressures in the euro zone eased slightly in April from March but were still above expectations, giving the European Central Bank little room to lower interest rates to help revive economic growth across the continent.

Consumer price inflation in the 17 nations sharing the euro moderated to 2.6 per cent year-on-year in April from 2.7 per cent in March, the EU’s statistics office Eurostat said on Monday. Economists polled by Reuters had forecast inflation of 2.5 per cent.

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Euro zone leaders are rallying to a call by ECB president Mario Draghi to reignite the bloc’s economy with policies that focus on growth – not just debt and deficit reduction – as the euro zone heads into its second recession in just three years.

But the ECB’s strong focus on containing inflation at a time of high world oil prices means politicians cannot expect a rate cut to lower the cost of borrowing any time soon.

While inflation is below last year’s peak of 3 per cent, economists and the ECB had expected prices to fall steadily as the economy stumbles and to offer some relief to households at a time of rising unemployment and sharp spending cuts.

But the rate of consumer price inflation rose in March from February and is now only back at February’s level, according to Eurostat, driven up by persistent worries of a crude oil supply disruption in the Middle East.

The ECB meets on Thursday for its May rate decision and economists overwhelmingly predict a rate freeze until at least the end of this year, according to a Reuters poll.

“We do not expect a significant decision on rates or operations (on Thursday), with the key rate to remain at 1 per cent,” Barclays Capital said in a note to clients.

Mr. Draghi said last week in Brussels that inflation was likely to remain above 2 per cent for the remainder of 2012 because of high energy prices and tax increases in the euro zone as governments seek more revenues to deal with the debt crisis.

Signalling the renewed focus on fighting inflation, Mr. Draghi said the bank “will pay particular attention to any signs of pass-through from higher energy prices to wages, profits and general price-setting.”

Mr. Draghi told the European Parliament it was “essential” to keep inflation at below, but close to, 2 per cent in the medium term, the bank’s long-maintained goal.

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