April 15 (Bloomberg) -- The European Central Bank signaled faster inflation will keep it from cutting interest rates even as investor confidence in Germany, Europe's largest economy, plunged.

ECB Executive Board member Juergen Stark said rates may not be high enough to contain inflation after French prices jumped 3.5 percent in March from a year earlier. Council member Nicholas Garganas said price pressure ``is more intense than previously foreseen'' and Miguel Angel Fernandez Ordonez said the ECB is ``always more worried about inflation'' than economic growth.

German investor sentiment unexpectedly fell as the higher cost of living, stronger euro and a looming U.S. recession damped the outlook for growth across the 15-nation euro region. While the U.S. Federal Reserve and Bank of England have reduced interest rates to bolster growth, the ECB refuses to follow suit as record oil and food prices fuel inflation.

``The ECB simply cannot afford to cut rates,'' said Guillaume Menuet, an economist at Merrill Lynch International in London. ``Inflation is starting to slow down the economy. Rates in Europe are unlikely to fall at all this year.''

The widening interest-rate gap between the U.S. and Europe drove the euro to a record $1.5913 last week, undermining euro- region exports. The currency dropped more than half a cent after the German confidence report. It traded at $1.58 at 5 p.m. in Frankfurt.

`Getting Worse'

The ZEW Center for European Economic Research in Mannheim said today its index of German investor and analyst expectations declined to minus 40.7 from minus 32 in March. Economists expected a gain to minus 30.

``News flow over the past month has been getting worse,'' said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt. ``Investors worry about company margins as the economic outlook deteriorates, the euro surges and inflation boosts their bills and hurts consumer spending.''

Oil rose to a record $113.93 a barrel today. In France, consumer prices increased 0.8 percent from February, the biggest monthly gain on record. France's 3.5 percent inflation rate matched the euro-region average in March, which is the fastest in almost 16 years. The ECB aims to keep inflation below 2 percent.

``We'll set rates so that inflation moves toward that objective and inflation expectations are anchored,'' ECB council member Ordonez, who heads Spain's central bank, told reporters in Madrid. Inflation is ``what has caused us since June not to lower interest rates when other banks have been doing so.''

The Fed has cut its benchmark rate by 3 percentage points to 2.25 percent since mid-September and the Bank of England last week reduced its key rate for a third time, to 5 percent. By contrast, the ECB left its main rate at a six-year high of 4 percent.

IMF Cuts Forecasts

The International Monetary Fund last week cut its prediction for euro-region economic growth to 1.4 percent for this year and 1.2 percent for next year. It said inflation will slow to 1.9 percent in 2009, giving the ECB room to lower interest rates.

ECB policy makers including Germany's Axel Weber and Luxembourg's Yves Mersch have challenged that forecast and said they see no scope for lower borrowing costs.

``There are medium-term risks to price stability,'' Garganas, Greece's central banker, told the Greek parliament in Athens today. He said inflation is not expected to even approach the bank's 2 percent ceiling this year.

``Risks to the medium-term inflation outlook remain clearly on the upside,'' ECB executive board member Gertrude Tumpel- Gugerell said today in a speech in Athens.

Stark suggested higher borrowing costs may be necessary to tame inflation. While the ECB believes current rates will help the bank achieve its inflation objective, ``we cannot be sure and we will continue to monitor very closely all developments,'' he told reporters in Brussels.

Investors raised bets that the ECB would stand pat through 2008. The yield on December interest-rate futures rose to 4.21 percent from 4.14 percent yesterday.

To contact the reporters on this story: Francois de Beaupuy in Paris at fdebeaupuy@bloomberg.net; Gabi Thesing in Brussels at gthesing@bloomberg.net.

Last Updated: April 15, 2008 14:05 EDT