Spain cuts utility prices to fight inflation

THE SPANISH government has announced wide-ranging cuts in utilities prices in an attempt to choke off domestic inflation, which is running well ahead of the European average.

The government has claimed that the cuts in gas, electricity and telephone prices will knock 0.2-0.3 per cent off the country's inflation rate, which spiked up from 1.8 per cent in February to 2.2 per cent last month. That is well above the average euro zone inflation rate of 0.8 per cent.

It is the first move by a European government to get around the one-size- fits-all interest rate policy for the euro area since the 10 euro countries gave up power to set their own interest rates at the start of the year.

The price cuts, which range from 1.5 per cent for electricity to as much as 10 per cent for some telephone charges, have been broadly welcomed by economists. But the fact that the burden has fallen heavily on the corporate sector - most of Spain's utilities are publicly quoted - has upset stock market investors.

Analysts said that the decision raises the question of whether other governments will now be tempted to find similar ways around the problem of how to regain control of the economy now that power over interest rates has been ceded to the European Central Bank in Frankfurt.

One broker said yesterday: "They don't have recourse to interest rates any more to fine-tune their economic policy, therefore these are the only measures available to them to do something specific to their economy."

The recent decision to cut euro interest rates by 0.5 per cent was welcomed in Germany, where the flagging economy is in need of a kick-start, but has raised concern in faster-growing economies such as Spain and Ireland, where tighter monetary policy would have been appropriate.

Spain has also announced a 7 per cent cut in motorway tolls and a reduction in the margin for wholesale sales of medical prescriptions and notary charges.

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