European Producer Prices Accelerate on Oil, Food

European producer-price inflation accelerated in February to the fastest pace in more than a year, sharpening the European Central Bank's interest rate dilemma, reported The Bloomberg.

Factory-gate prices rose 5.3 percent from the year-earlier month, the most since August 2006, after increasing 5 percent in January, the European Union statistics office in Luxembourg said today. The February rate exceeded the 5.2 percent median forecast of 25 economists in a Bloomberg News survey.

ECB governing council member Christian Noyer said yesterday that policy makers must ensure that inflation expectations are anchored before they consider lowering interest rates to support economic growth. The euro region economy will slow to about 1.7 percent pace this year from 2.6 percent in 2007 the central bank forecasts as the U.S. suffers its worst financial crisis since the great depression.

``This will give a further boost to the ECB's inflation concerns,'' Martin Van Vliet, an economist at ING Bank in Amsterdam, said. The central bank ``will need to see much more evidence of commodity prices easing before they even start to consider curbing their hawkish rhetoric.''

Crude-oil prices breached $100 a barrel for the first time in February and reached $111 last month. The price increases for oil and food commodities such as wheat have pushed consumer-price inflation to a near 16-year high of 3.5 percent, above the European Central Bank's 2 percent ceiling.

``Price pressures along the production chain are still quite high,'' said Giada Giani, an economist at Lehman Brothers in London. ``It's energy prices and to some extent food prices. Both of these components were quite lively in February again.''

From the previous month, producer prices increased 0.6 percent in February, after rising 0.9 percent in January.

Soaring inflation is preventing the ECB from cutting interest rates even as economic growth cools. ECB council member Christian Noyer yesterday said policy makers must anchor price expectations before reducing rates.

``A solid anchoring of inflation expectations remains a pre- requisite for rate cuts in times of heightened financial uncertainty and downside risks to growth,'' Noyer said in Prague.

The International Monetary Fund said the ECB has room to cut interest rates as economic growth slows ``sharply,'' according to a background paper obtained by Bloomberg News at a meeting of Southeast Asian finance officials in Vietnam.

The worst U.S. financial crisis since the Great Depression has spread to Europe and ``the ECB can now afford some easing of the policy stance,'' the IMF said in the paper. The fund lowered its forecast for 2008 euro-area growth to 1.3 percent from its earlier projection of 1.6 percent, according to the document.