Reuters/Brussels
Eurozone inflation rose further above the European Central Bank’s target in April, increasing the chances of an interest rate rise in June, despite a weakening of economic sentiment and household demand. Inflation in the 17 countries using the euro rose to 2.8% year-on-year this month from 2.7% a month earlier, the highest level since October 2010, when it was 3.2%. Consensus expectations had been for a flat reading compared to March ahead of next Thursday’s European Central Bank meeting on interest rates. Analysts said the numbers raised the odds on a rise in rates in June. “Although we expect a rate increase at the July meeting, the balance of risks is tilted towards an earlier move,” said Aline Schuiling, senior economist at ABN Amro. The ECB raised its main interest rate from record lows of 1.0% to 1.25% in April, concerned about the impact on consumer prices of rising costs of energy and food. “The upside surprise relative to our forecast may be due to a stronger-than-expected impact of the late Easter, meaning that core inflation probably was a touch firmer than we had thought,” said Marco Valli, economist at Unicredit. “We see inflation hovering around the current level for some time, with a further acceleration to 3% likely towards the end of the summer.” Other data this month, however, has suggested growth in both Germany and the eurozone is peaking and figures from Spain, the biggest economy under threat in Europe’s debt crisis, showed unemployment soaring and retail sales sinking. A monthly European Commission survey showed economic sentiment in the eurozone as a whole fell for the second month in a row to 106.2 in April, down from 107.3 in March and below market expectations of a decline to 107.0. “The combination of high oil prices, a strong euro, and fiscal and monetary tightening has started to dent the economic mood in the eurozone,” said Martin van Vliet, economist at ING. The decline in sentiment ran through all sectors of the economy except construction, with consumer optimism falling the most to -11.6 from -10.6 in March. ECB data also showed that the annual growth rate of loans to the private sector in the single currency area slowed in March, bucking expectations for a rise, but M3 money supply growth accelerated. Belgium, a bellwether for the eurozone economy, reported faster than expected first quarter economic growth of 1% quarter-on-quarter, against 0.6% expected on average by economists polled by Reuters. “Monetary data continue to point to a modest recovery in euro area money and loan growth,” said Christoph Balz, economist at Commerzbank. “While the data in itself do not indicate upside risks to price stability that require further monetary tightening, they are further proof that the economic situation has changed substantially since 2009 - which is why the ECB thinks that extremely low interest rates are no longer appropriate. GDP data for the whole eurozone is due on May 13. More evidence of weakening household demand could be seen in retail sales data. Sales in Germany fell in March, defying expectations of a rise as consumers bought fewer groceries and textiles during a month when inflation surpassed the 2% threshold. Adjusted for consumer price rises, sales declined by 2.1% month-on-month, and by 3.5% year-on-year. The drop in consumer demand was more pronounced in the “peripheral” eurozone countries seeking to win back market confidence in their public finances with tough austerity measures. In Spain sales fell 8.6% year-on-year in March and in Greece the decline was 10.6% in February. Eurozone consumer inflation expectations, which have been rising quickly since November 2010, edged marginally lower to 30.7 from 30.8. Selling price expectations among manufacturers, on the rise since August 2010, fell more markedly to 21.5 from 24.4. The European Commission’s business climate indicator, which points to the phase of the business cycle, also fell for the second month in a row, to 1.28 points from 1.43 in March.