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Business

Eurozone inflation exceeds ECB target

Consumer prices in the euro currency area have accelerated to hit two percent for the first time since January 2013, adding to pressure on the European Central Bank to taper its massive monetary stimulus.

Surging to a four-year high, annual inflation in the 19-member currency bloc reached two percent in February, driven mainly by higher energy prices, showed latest figures released by the EU statistics office, Eurostat, on Thursday.

The inflation reading rose from 1.8 percent in January and comes amid steeply rising prices in Germany and Spain, which registered inflation rates of 2.2 percentand three percent last month.

According to Eurostat data, energy prices climbed 9.2 percent year-on-year in February, while the prices for services increased 1.3 percent. Food, alcohol and tobacco cost 2.5 percent more.

ECB stimulus working

In a bid to boost low inflation in the eurozone, the European Central Bank (ECB) has launched unprecedented stimulus measures, including cutting interest rates to a historic low of zero percent and buying up assets worth more than 1.5 trillion euros ($1.58 trillion) in the past two years.

As the inflation rate has exceeded the ECB's target of "just under two percent," the central bank for the euro area is likely to face renewed pressure to gradually end its ultra-loose monetary policy.

However, ECB president Mario Draghi will argue that the core inflation measure, which strips out volatile energy and food prices, remained unchanged at 0.9 percent, indicating that the economic recovery is still fragile.

Moreover, the ECB wants to lower the debt burden of crisis-hit eurozone members, such as Italy, Greece and Portugal, by keeping interest rates low while inflation rises.

German hawks

But this will only increase the ire of Germany and other better-off eurozone countries, which fear that runaway inflation will dent economic growth and disproportionately hurt millions of savers in their countries.

Germany, for example, reported a February inflation rate of 2.2 percent on Wednesday - the highest in four and a half years. With overall savings of five trillion euros and interest rates at zero, an inflation rate of two percent means Germans are basically losing 100 billion euros per year.

Facing a general election in September, German politicians are already calling on the ECB to start increasing interest rates and reducing its bond-buying program.

Economists believe that inflation in the eurozone is set to pick up speed in the course of 2017, not least because of higher prices on a global scale fueled by the reflationary policies of US president Donald Trump.

Watch video 03:09

Bundesbank chief makes plea for higher rates

uhe/kd (Reuters, AFP, dpa)

 

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