More ECB rate cuts expected as inflation falls

Friday 14 November 2008 19.05
More ECB rate cuts expected as inflation falls

Inflation in the euro zone fell back in October to a nine-month low of 3.2% as oil prices slumped, the Eurostat data agency confirmed today.

The figure, which compared with 3.6% in September, marked the third month in a row that consumer prices have fallen since hitting a record 4% in June and July on the back of all-time high oil prices.

Economists have said that inflation would probably keep falling in the coming months, increasing the scope for the European Central Bank to cut interest rates in the face of sharply slowing economic activity.

Since reaching a peak July of nearly $150 a barrel, oil prices have more than halved in the face of a deteriorating global economic outlook.

Meanwhile, the European Central Bank's senior economist Juergen Stark today underpinned expectations of further interest rate cuts to battle the effects of an economic recession.

'If our analysis allows for it, we do not rule out using this instrument again,' Stark told German radio station a week after the ECB cut its main lending rate for the second time in a month, to 3.25%. '

Following combined cuts of one percentage point, ECB president Jean-Claude Trichet also implied last week that the bank could decrease the cost of borrowing even further owing to signs that economic activity was falling.

Two of the biggest euro zone economies, Germany and Italy, are now in recession, but inflation has also come off the boil and the ECB has room to lower its lending rate rapidly and to a low level, analysts say.