Eurozone inflation hits record high as ECB mulls next step

The European Central Bank will be delighted that eurozone inflation reached a record high of 4.9 percent in February, from 4.7 percent the previous month. Inflation in the currency bloc had been tumbling steadily from a peak of 5.1 percent in April 2016, hitting its lowest level since 2013 in December. The surprisingly strong figure pushed the euro to a 16-month high against the dollar.

The data was released Friday as the ECB deliberates its next move when it meets next week. The central bank has already hiked rates twice and taken extraordinary steps to buy up government bonds to drive up inflation. Inflation in the eurozone is now running at a higher than expected level of 4.9 percent, its highest level since December 2014.

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“It would appear that this price increase, while not yet typical of what we see from the U.S., is further evidence that the underlying inflation profile is improving and inflation expectations are moving in the right direction,” said Janet Henry, chief economist at the investment manager Pimco.

The ECB cut its key interest rate deep into negative territory at the end of 2014 in an effort to get money into the economy to help growth. It has also kept the benchmark rate – the rate that banks charge each other on loans – at a record low zero since 2015.

In the bond purchases, the ECB is essentially buying government bonds in its quest to pump cash into the economy. Unlike other countries, it has been restricted to buying only debt issued by eurozone countries, such as Greece, Italy and Spain.

The ECB now anticipates slowing the pace of its bond purchases. It has already bought €2.3 trillion (£2 trillion) of bonds, which is running out of eligible euro-government debt, and intends to reduce its monthly purchases to €30 billion (£25 billion) from the current €60 billion (£52 billion) starting in April.

There is some concern that the bonds purchased have pushed up bond yields, which could increase borrowing costs for businesses and households. If that happens, the ECB has said it could look at raising rates before the end of the year. In December, the ECB raised the benchmark short-term interest rate it charges banks to borrow from 1 percent to 1.25 percent.

But many analysts don’t expect the ECB to move on rates before the end of the year. They suggest that the bank could delay any action until after the German elections in September or next year’s European Parliament elections, which could be dominated by the eurozone’s potential break-up.

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