Euro-zone inflation fell to 1.6 per cent in February, its lowest level since November 1999, fuelling renewed speculation about the possibility of an interest rate reduction in coming months.
The bigger-than-expected drop in headline inflation - now well under the European Central Bank's (ECB's) "close to but below 2 per cent" price stability target - removes a key constraint on a future rate cut.
But economists ruled out a rate move at next week's ECB meeting, saying it would want to see more price data before it was convinced inflation was undershooting its target.
The ECB will also be determined to resist the growing clamour for a rate cut from eurozone politicians, who fear the strong euro may hurt exporters.
"The chances of a rate cut next week are less than 10 per cent... we shall be tearing up the rule book for interpreting the ECB if it does," said Mr Julian Callow of Barclays Capital.
With robust global growth and still ample liquidity in the euro zone, most economists believe policy change is unlikely in the short term, barring a substantial loss of momentum and confidence in the 12 nation bloc.
Recently there has been intense speculation that the ECB may cut rates in reaction to a downward revision of its quarterly growth and inflation projections, which will be discussed at next week's meeting. But economists think the revisions will not be significant enough to prompt a policy change and that the ECB's below-consensus forecast of just 1.6 per cent growth this year remains intact.
Earlier this week, Mr Nicholas Garganas, the Greek central bank governor and a member of the ECB's governing council, suggested euro-zone growth this year could beat the forecast.
As a result, Mr Jean Claude Trichet, ECB president, is likely to restate next week that "rates are appropriate", although he may soften some of his rhetoric and signal concern about weak consumer demand.
The data from Eurostat, the European Union's statistical agency, underscored the lack of inflationary pressures. It also revised down January inflation to 1.9 per cent from 2 per cent.
A drop in inflation combined with a euro close to $1.35 and clear evidence of slowing global growth will be needed to prompt a cut in rates, which have been held at a post-war low of 2 per cent since June, say analysts.
Meanwhile, a separate business climate indicator by the EU executive turned less rosy in February when it lurched down from revised January levels. The indicator eased to 0.01 from a revised figure of 0.11 for January.
With economic growth lacklustre and without much momentum, there is growing concern that the euro's rise could derail the recovery before it really takes hold.
The influential German Ifo survey, for example, showed a decline in business sentiment for the first time in 10 months as the impact of the euro's 20 per cent rise against the dollar over the past year hits companies' ability to compete internationally.
The French Prime Minister, Mr Jean-Pierre Raffarin, and the German Chancellor, Mr Gerhard Schröder, have both this week called on the ECB to cut interest rates to fight a rising euro. - (Financial Times Service, Reuters)
