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Unemployment in the Euro Zone Falls, ECB Rate Hikes Expected

Unemployment in the euro zone hit a new record low in March, a move economists said would likely boost future private consumption and put upward pressure on wages, triggering more European Central Bank rate rises.

European Union statistics office Eurostat said on Wednesday the seasonally adjusted jobless rate in the 13 countries using the euro dipped to 7.2% -- the lowest reading since its records began in 1993 -- from 7.3% in February.

The decline was led by the bloc's biggest economies Germany and France, but also by Ireland, Belgium, the Netherlands and Slovenia. Eurostat said 10.8 million people were unemployed in the euro area in March, down from 12.1 million a year earlier.

"The improving labour market points towards a significant strengthening of private consumption to come, which will probably offset the impact of the stronger euro on overall growth," said Holger Schmieding, economist at Bank of America.

"The tighter labour market means also more wage inflation, especially in Germany, where the change is most dramatic."

Unemployment in Germany fell to 7.0% in March, Eurostat said, from 7.1% in February.

The European Central Bank is concerned that the tightening labour market, a result of relatively fast economic growth, could prompt wage increases during the current round of negotiations in Germany that are higher than productivity gains.

That would fuel inflation, which the bank wants to keep just below 2%.

Markets expect the ECB to raise interest rates by 25 basis points to 4.0% in June and perhaps once more later in the year to stem medium-term inflationary pressures, further boosted by the fastest money supply growth in 24 years.

"The ECB is likely to regard the further tightening in the euro zone labour market in March as heightening the danger that wages could move higher over the coming months, as well as being supportive to growth," said Howard Archer, chief European economist at Global Insight.

"Consequently, there remains a distinct possibility that the ECB could tighten monetary policy modestly further after a seemingly certain 25 basis point hiking of its key interest rate to 4.00% in June," he said.

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