Euro bank's dilemma as both inflation and unemployment rise

The policy dilemma facing the European Central Bank intensified today after new figures showed both inflation and unemployment rising above expectations.

Official estimates show Eurozone inflation rose from 4.0% to 4.1% in June – the highest reading for sixteen years. At its last meeting in early July the ECB raised interest rates to 4.25% from 4.0% in response to the growing inflationary threat.

At the same time however, unemployment in the Eurozone and the broader European Union is also climbing more rapidly than policymakers would like. A separate EU announcement today put the Eurozone unemployment rate in June at 7.3%, while at the same time unexpectedly revising the May figure up from 7.2% to the same level. Both numbers were above expectations.

In the 27-nation EU, meanwhile, the official unemployment rate now stands at 6.8%.

The spike in both readings presents a clear dilemma for ECB policymakers. While it has made clear its commitment to fighting inflation - now more than 2% above its target rate - increasing inetrest rates even further would be politically difficult given the rapid economic slowdown being suffered across much of the region.

Particularly worrying for both European central bankers and politicians is the wide divergence in unemployment rates across the fifteen countries in the Eurozone. In Spain, for example - currently suffering a sharp housing-led economic slowdown - the official unemployment now stands at an uncomfortable 10.1% - up from 8.1% a year ago.

In Germany, however, the unemployment rate fell in the year to June, from 8.4% to 7.3%, though given recent economic data a future increase in joblessness might be expected. In the Netherlands, meanwhile, the unemployment rate stood at just 2.8%.

It is clear some nations need an interest cut more than others, piling more pressure on the ECB. As such ECB policy is likely to become a hot political issue over the next few months if the economic slowdown is as bad as many fear.