April 7, 2011 / 10:18 AM / in 9 years

Euro zone core inflation subdued - EU report

BRUSSELS (Reuters) - Domestically generated inflation in the euro zone is subdued, with the single currency bloc’s recovery on track, but economic growth comparatively weak and unbalanced, the European Commission said on Thursday.

In its quarterly report on the 17-nation euro zone, the European Union’s executive said that the main reason for the acceleration of headline inflation — to an annual rate of 2.6 percent in March — was higher commodity and fuel prices.

“The considerable amount of spare productive capacity in the euro area means that the prospects for core inflation have not picked up significantly,” the report said.

“Inflation divergences within the euro area have widened with the outbreak of the economic and financial crisis,” it continued.

The report also looked into the issue of banks needing to hold more capital, set to be a requirement under new global “Basel III” rules.

“The report shows that raising the capital requirements for banks would be associated with a significant reduction in GDP volatility, but may come at the expense of slightly lower GDP growth in the medium term,” the report said.

In a later section, the report discussed data from economic surveys of the euro zone.

They showed, the European Commission said, that the current recovery remained on track, but with “comparatively weak and unbalanced” economic growth.

“Furthermore, surveys also point to a number of factors in the household and corporate sector that may act as a drag on medium-term growth,” the report said.

Reporting by Philip Blenkinsop

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