March 31 (Bloomberg) -- European inflation accelerated to the fastest pace in almost 16 years, making it harder for the European Central Bank to cut interest rates as a global credit squeeze saps confidence among executives and consumers.

Consumer-price inflation in the euro area accelerated to 3.5 percent this month, the highest rate since June 1992, the European Union's statistics office in Luxembourg said today. The euro rose after the publication of the figure, which was higher than economists had forecast. A separate report showed consumer and business confidence declined in March.

The ECB is refusing to follow the U.S. Federal Reserve and reduce interest rates in response to a global crisis as food and energy prices fuel inflation. ECB council member Erkki Liikanen said today that inflation expectations have ``hardened'' and at the same time is concerned that the growth outlook has ``become more subdued,'' summing up the central bank's dilemma.

``This will surely dash any residual hopes of a near-term rate cut,'' said Dario Perkins, an economist at ABN Amro in London. ``With inflation this high, it would take a major deterioration in the real economy to prompt the ECB to lower interest rates this year.''

The March inflation rate compared with the 3.3 percent median forecast of 36 economists in a Bloomberg News survey.

The Federal Reserve has cut its benchmark rate to 2.25 percent from 5.25 percent in the last six months, and the Bank of England has also lowered its key rate.

Six-Year High

While the ECB has left its rate at a six-year high of 4 percent, it has taken steps to boost liquidity after credit markets seized up. Last week it allotted 216 billion euros ($341.6 billion) in its regular weekly refinancing operation, 50 billion euros more than it estimated was required, and offered further cash over periods of three and six months.

``They probably don't think rate cuts would do much to help the problem,'' Alex Patelis, head of international economics at Merrill Lynch & Co., said in a Bloomberg Television interview in London. ``They view it as a liquidity issue and operating with more micro measures is likely to be more effective in their view.''

M3 money-supply growth, which the ECB uses as a gauge of future inflation, slowed in February to 11.3 percent from a year earlier after a 11.5 percent gain in January, the Frankfurt- based ECB said today in a monthly report. Economists expected the rate to remain unchanged.

Construction Industry

Consumer and business confidence fell to 99.6 this month from 100.2 in February, led by the construction industry, the European Commission said today. Economists had forecast a decline to 100 from an initially reported 100.1 in February. The construction confidence measures fell in Germany, Europe's largest economy, Spain, Ireland and Italy all declined.

The euro rose as high as $1.5834 after the inflation report and was up 0.1 percent to $1.5813 as of 10:57 a.m. in London.

The currency's 11 percent advance against the dollar in the last six months, which makes euro-area goods less competitive, and oil prices above $100 a barrel are hitting confidence in the euro area. At the same time, the worst U.S. housing slump in more than a quarter of a century is slowing the world's largest economy, damping demand for European exports.

European retail sales fell in March and consumer confidence in France fell to a record low, according to reports last week.

Inditex SA, Europe's largest clothes retailer, said today that fourth-quarter profit growth was the slowest in four years and warned that sales probably will miss the high end of its forecast in coming years.

`More Subdued'

``While the outlook for growth has become more subdued, inflation in the euro area has gathered pace,'' Liikanen, who is also governor of the Bank of Finland, said in a statement today. ``Inflation expectations have also hardened.''

Still, there are signs the euro-area economy is so far weathering the U.S.-led slowdown. German and French business confidence climbed in March and unemployment in the euro region was a record low 7.1 percent in January.

ECB council member Axel Weber said on March 28 there may be a greater case for raising rather than cutting interest rates. Growth is ``fundamentally robust'' and the ECB ``will act'' if its price-stability goal is threatened, he said. The ECB's inflation ceiling of 2 percent has been exceeded in the last eight years.

While price expectations by companies and consumers eased in March, the consumer-price outlook remains ``close to the high levels'' reached in 2001, the commission said in today's report. The reading of 26 for consumer price expectations is above the gauge's average since 1990 of 23.

The inflation figure published today is a first estimate by the statistics office, which will publish a final figure on April 16.

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.

Last Updated: March 31, 2008 06:40 EDT