Shock plunge in eurozone inflation

Published on Tuesday 6 January 2009 20:17

EUROZONE inflation plunged by more than expected to a 26-month low as economies of the 15 countries using the single currency last year slowed sharply, figures out yesterday showed.

The larger-than-expected fall hit the euro as markets anticipated a deep European Cental Bank rate cut next week.

According to the European Union's statistics office, Eurostat, in December inflation in the nations using the euro was 1.6 per cent year-on-year.

That was down from 2.1 per cent in November and below the ECB target of "maintaining inflation rates below, but close to, 2 per cent".

Economists had expected a decline to 1.8 per cent, and the new figures added to pressure for a cut in interest rates to keep price growth from diving beneath the ECB's goal.

ECB governing council member Vitor Constancio said the bank should make a "pre-emptive" cut in interest rates to avoid inflation falling too far below 2 per cent although he claimed that deflation was not on the horizon for Europe.

ECB rate cut expectations were also boosted by data showing the eurozone private sector services economy shrank sharply in December and firms cut more jobs than expected.