The euro zone economy picked up speed in the first quarter of 2005 but March inflation was just above the European Central Bank's medium-term target level of 2 per cent, the European Commission said yesterday.

In a report on the economy of the 12-nation area, it said quarterly growth of 0.5 per cent was due to improving domestic demand, and the bloc should continue to grow at a steady pace in coming months.

But despite the improvement from 0.2 per cent growth in the fourth quarter of 2004, the European Union executive cautioned that the underlying strength of the economy should not be overestimated, referring to mixed signals from business surveys.

Euro-zone inflation was confirmed at an annual rate of 2.1 per cent in March, despite a monthly surge of 0.7 per cent - the highest jump in the history of the data - due to a seasonal increase in the price of clothing.

Economists, however, were little concerned over the monthly rise in prices, noting it was due to the ending of winter sales and the core inflation rate was steady at 1.6 per cent.

Economists said the inflation figures were unlikely to prompt a rise in official euro zone interest rates.

"We believe the ECB can keep interest rates unchanged for many more months to come, particularly given the current worrying growth outlook. Indeed, we currently do not expect the central bank to act this year," said Howard Archer of Global Insight.

Euro-zone inflation also stood at an annual 2.1 percent in February. - (Reuters)