THE EUROPEAN CENTRAL Bank is set to keep interest rates at the record low of 1 per cent later today.

Imflaton in the eurozone dropped to 2.6 per cent in March, which was above the ECB target of just under 2 per cent. However, fresh worries about Spain’s economy means the ECB will not be able to rise rates, Reuters reports.

Exiting funding measures – a move being pushed for by Germany – is also unwise in the context of the Spanish situation, former ECB economist Christian Schulz told the news agency.

Prospects for growth uncertain

Unemployment and manufacturing indicators suggest the 17 countries that use the euro are headed for an official recession. Adding to these worrying signs is the realization that many of the traditional tools to give growth a shove — government spending, tax cuts and lower central bank interest rates — are off the table.

On Monday, the Markit index of industrial activity for the eurozone strongly suggested that the region’s economy is still contracting after shrinking 0.3 per cent in the last three months of 2011. Two straight quarters of falling output are a common definition of recession.

Meanwhile, unemployment across the 17-country group crept up to a record 10.8 per cent, official figures also released on Monday showed. And national jobless rates paint an even more disturbing picture — especially among the countries hit worst by the debt crisis: Spain at 23.6 per cent unemployed, Greece 21.0 per cent, Ireland 14.7 per cent.

Eurozone economy

The European Union’s executive commission estimates that the eurozone economy will shrink by 0.3 per cent this year, while Greece faces shrinkage of 4.4 per cent in the fifth year of a deep recession. Italy faces a 1.3 drop in output according to commission forecasts while Spain will fall 1.0 per cent.

Short-term answers are scarce. The debt crisis hitting the eurozone means governments can no longer spend their way out of a downturn— in fact, they are doing the opposite and embarking on rounds of austerity cuts.

Additional reporting by the AP

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