* Euro zone businesses have good start to 2014
* Firms still cutting, not raising, prices
* ECB not likely to ease policy on Thursday
By Jonathan Cable
LONDON, April 3 Euro zone businesses started
2014 with their best quarter in three years, but buoyant growth
came at a cost as they slashed prices to drum up trade, which
could further stoke deflation fears.
The European Central Bank is not expected to ease policy
when it meets later on Thursday, relying instead on verbal
support to allay fears that falling prices in several euro zone
countries could spread to the whole bloc.
"The ECB is primarily concerned about what is happening with
inflation, and yes we have too little for the ECB's comfort,"
said Peter Dixon at Commerzbank.
"But I think they want to see if the most recent set of
numbers marks a trough before acting further."
The Composite Purchasing Managers' Index, which compiler
Markit said pointed to first-quarter growth of 0.5 percent, was
followed by official data which showed retail sales rose more
than expected in February.
If Markit's estimate is realised, it would beat expectations
in a Reuters poll last month for a more modest 0.3 percent
expansion and mark the fastest pace of growth since early 2011.
"We've had a reasonable overall set of data, these numbers
were generally pleasing," Dixon added.
The Composite PMI, a broad survey of businesses that is
regarded as a good gauge of growth, dipped to 53.1 in March from
February's 32-month high of 53.3, holding above the 50 mark that
divides growth from contraction for the ninth month.
The German, French and Spanish service industry PMIs were
all solid last month although Italy's unexpectedly fell back
into contraction territory, casting some doubt on the strength
of its recovery.
Separate data showed Britain's dominant services sector
expanded steadily in March, pointing to solid economic growth in
the first quarter.
NO ECB ACTION YET
Even as input costs rose, firms cut charges for the goods
and services they sold at a faster rate than in February.
Official euro zone inflation fell to just 0.5 percent last
month, its lowest since November 2009 and well below the ECB's 2
percent target ceiling.
On Wednesday, the head of the International Monetary Fund
called on the ECB to ease monetary policy to move prices higher,
saying "low-flation" in advanced economies risked undercutting
an already sluggish global recovery.
"More monetary easing, including through unconventional
measures, is needed in the euro area," IMF Managing Director
Christine Lagarde said.
But with its refinancing and deposit rates already at record
lows, the ECB has few options left to support a weak recovery or
drive up inflation.
While ECB policymakers have been willing in recent weeks to
publicly broach cutting deposit rates below zero - effectively
charging banks to hold cash with the ECB - or embarking on bond
purchases as the United States, Japan and Britain have, it is
not something they are expected to do.
ECB President Mario Draghi is instead likely to play up the
central bank's readiness to tackle downside risks to inflation,
in order to stem a rise in the euro, which has a dampening
effect on import prices the more it climbs.
"Should the ECB decide to sit on its hands Draghi is
expected to assume a very dovish tone during the press
conference and reiterate that the euro zone needs a high degree
of accommodation and that the ECB stands ready to act," said
Annalisa Piazza at Newedge Strategy.
(Editing by Catherine Evans)