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Price cuts aid first-quarter growth for euro zone businesses

A plant belonging to Germany's largest drugmaker Bayer is seen in Leverkusen December 15, 2013. REUTERS/Ina Fassbender
A plant belonging to Germany's largest drugmaker Bayer is seen in Leverkusen December 15, 2013. REUTERS/Ina Fassbender

By Jonathan Cable

LONDON (Reuters) - Euro zone businesses started 2014 with their best quarter in three years, but buoyant growth came at a cost as they slashed prices to drum up trade, which could further stoke deflation fears.

The European Central Bank is not expected to ease policy when it meets later on Thursday, relying instead on verbal support to allay fears that falling prices in several euro zone countries could spread to the whole bloc.

"The ECB is primarily concerned about what is happening with inflation, and yes we have too little for the ECB's comfort," said Peter Dixon at Commerzbank.

"But I think they want to see if the most recent set of numbers marks a trough before acting further."

The Composite Purchasing Managers' Index, which compiler Markit said pointed to first-quarter growth of 0.5 percent, was followed by official data which showed retail sales rose more than expected in February.

If Markit's estimate is realized, it would beat expectations in a Reuters poll last month for a more modest 0.3 percent expansion and mark the fastest pace of growth since early 2011.

"We've had a reasonable overall set of data, these numbers were generally pleasing," Dixon added.

The Composite PMI, a broad survey of businesses that is regarded as a good gauge of growth, dipped to 53.1 in March from February's 32-month high of 53.3, holding above the 50 mark that divides growth from contraction for the ninth month.

The German, French and Spanish service industry PMIs were all solid last month although Italy's unexpectedly fell back into contraction territory, casting some doubt on the strength of its recovery.

Separate data showed Britain's dominant services sector expanded steadily in March, pointing to solid economic growth in the first quarter.

NO ECB ACTION YET

Even as input costs rose, firms cut charges for the goods and services they sold at a faster rate than in February.

Official euro zone inflation fell to just 0.5 percent last month, its lowest since November 2009 and well below the ECB's 2 percent target ceiling.

On Wednesday, the head of the International Monetary Fund called on the ECB to ease monetary policy to move prices higher, saying "low-flation" in advanced economies risked undercutting an already sluggish global recovery.

"More monetary easing, including through unconventional measures, is needed in the euro area," IMF Managing Director Christine Lagarde said.

But with its refinancing and deposit rates already at record lows, the ECB has few options left to support a weak recovery or drive up inflation.

While ECB policymakers have been willing in recent weeks to publicly broach cutting deposit rates below zero - effectively charging banks to hold cash with the ECB - or embarking on bond purchases as the United States, Japan and Britain have, it is not something they are expected to do.

ECB President Mario Draghi is instead likely to play up the central bank's readiness to tackle downside risks to inflation, in order to stem a rise in the euro, which has a dampening effect on import prices the more it climbs.

"Should the ECB decide to sit on its hands Draghi is expected to assume a very dovish tone during the press conference and reiterate that the euro zone needs a high degree of accommodation and that the ECB stands ready to act," said Annalisa Piazza at Newedge Strategy.

(Editing by Catherine Evans)

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