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Euro-Zone Inflation Falls to 1.8%

Inflation in the 13 nations that share the euro currency slowed by more than expected to 1.8% in January, the EU statistics agency said Wednesday, a figure that may undermine the European Central Bank's case for raising interest rates again next month.

Eurostat also reported that euro unemployment fell to a new low at 7.4% as Europe's accelerating economy finally creates more jobs.

Year-on-year inflation is now below the European Central Bank's just-under 2% guideline, although analysts expect the bank to raise its key interest rate by a quarter of a percentage point to 3.75% on March 8 to cool the effects of more money sloshing around the economy.

Eurostat's first estimate for January inflation, published Jan. 31, said the rate would stay the same as December at 1.9%.

Over the year, it said the falling cost of transport fuel and telecom services had the biggest downward impact on the rate. This outweighed higher prices for natural gas, restaurants and cafes, tobacco and electricity.

But rising inflation is not the only reason to raise rates.

Interest Rate Rise Reasons

In Frankfurt, Commerzbank analyst Michael Schubert pointed to monetary growth in January: "Monetary growth still points to hiking rates further and I continue to look for a move of 25 basis points in March, followed by a move to 4% during the second quarter of 2007."

In Antwerp on Monday, ECB governing council member Guy Quaden said that the bank's "current posture is of strong vigilance," suggesting once again that interest rate increases may take place soon. He said current rates weren't slowing growth or keeping businesses from expanding.

Inflation rates differ widely across Europe, Eurostat said, with Germany -- the EU's largest economy, at the euro average of 1.8%, while the Netherlands reported the lowest euro-zone figure, a provisional 1%, below Finland's 1.3% and France's 1.4%. Greece topped the euro-zone league at 3%, closely followed by Ireland at 2.9%.

In the EU as a whole, euro candidates Malta and Cyprus reported 1.2% and 1.4% respectively -- a good sign for their euro membership bids -- while, at the other end of the scale, Hungary hit 8.4%. Baltic states that had planned to join the euro in the near future are still reporting above-average inflation. Latvia was 7.1%, Estonia 5% and Lithuania 4%.

Unemployment Rates

Economic growth is finally paying a dividend in terms of more jobs as Eurostat reported a new drop in the jobless rate in the euro zone to 7.4% from 7.5% in December, with the rate for the entire EU sinking to 7.5% from 7.6% a month earlier.

Unemployment was lowest in the Netherlands, at 3.6%, and highest in Poland at 12.6% -- falling sharply as the Polish economy picks up and labor migrants seek jobs elsewhere.

Eurostat said 17.5 million men and women were out of work in the EU's 27 nations in January, 11.1 million of them in the euro area. For the euro area, this means over a million people have found work from a year ago.

Looking ahead, European Commission economic weathervanes were more optimistic for February, down from a bout of lower confidence a month below.

Its survey of economic sentiment -- both business and consumer confidence -- rose to 112 in the EU, up from 110.7 in January while the euro area picked up to 109.7 from 109.2 a month earlier.

Confidence among EU industry and consumers was up while the confidence in the services sector diminished, it said. In the euro area, better consumer confidence outweighed drops in retail and construction while industry and services remained stable.

The EU executive arm's survey of managers' views also climbed. Its business climate indicator for the euro area rose to 1.56 from 1.39 in January as managers said they saw brighter prospects for exports, total orders and stocks of finished products. However, they expect that production may not go on at current levels.

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