Eurozone inflation falls to lowest since February 2010

NICOSIA, CYPRUS - MARCH 27: Women shop in a supermarket on March 27, 2013 in Nicosia, Cyprus. After days of negotiation, Eurozone finance ministers have agreed terms for a 10 billion euro bailout deal, which aims to prevent the collapse of Cypriot banks and ensure that Cyprus remain in the Eurozone. Yiannis Kyrpi, the chief executive of Bank of Cyprus, has been removed from his post following the agreement, whilst banks remain closed to the public and are expected to enforce withdrawal restrictions when they re-open. (Photo by Milos Bicanski/Getty Images) Milos Bicanski

LONDON Inflation across the 17 countries that use the euro fell further below target in September, official figures showed Monday, news that could encourage the European Central Bank to cut interest rates again if the recovery across the eurozone stalls.

Eurostat, the EU's statistics office, said consumer prices were up 1.1 percent in the year to September, down from the 1.3 percent rate recorded the previous month. September's rate was also the lowest since February 2010 and below expectations -- the consensus in the markets was for a more modest decline to 1.2 percent.

The statistics agency said energy and food prices drove the fall in September. However, the core rate -- which excludes food, alcohol and tobacco -- also fell, to 1 percent from 1.1 percent, further proof that underlying price pressures are benign.

"This is welcome news for eurozone consumers as it helps their purchasing power and it also means that the ECB can at the very least maintain its extremely accommodative policy for an extended period and actually has ample scope to take further stimulative action if it feels the need," said Howard Archer, chief European economist at IHS Global Insight.

Though the inflation figures will likely be discussed this week when the ECB holds its monthly meeting, they are unlikely to prompt any immediate action.

The ECB is tasked with setting monetary policy to keep inflation at just below 2 percent, but few economists think the central bank's governing council will reduce its benchmark rate further from the record low of 0.5 percent amid signs that the economy is recovering.

In the second quarter of 2013, the eurozone economy grew by a quarterly rate of 0.3 percent, largely on the back of Germany, Europe's biggest economy. That followed six straight quarterly declines, the region's longest recession since the euro currency was launched in 1999.

However, recent economic indicators have suggested that the recovery is proving more broad-based -- even Greece is expected to start growing soon.

Analysts said inflationary pressures will likely remain weak in the months ahead given the amount of spare capacity that exists in many parts of the eurozone following the recession. The recent fall in energy prices -- caused by a drop in concerns over a U.S.-led military strike on Syria -- is also expected to keep a lid on inflation.

"The upshot of all this is that eurozone inflation is likely to fall further below the ECB's target," said James Howat, European economist at Capital Economics. "So the ECB has plenty of scope to loosen monetary policy further."

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