The European Central Bank cemented today expectations of another interest rate cut next week as inflation in Germany, the euro zone's biggest economy, tumbled this month.
German inflation fell a full percentage point in November, marking a drop for the fourth month running and pointing to easing price pressures in the broader euro zone.
The ECB's Governing Council meets on December 4th in Brussels and analysts polled by Reuters expect another 50 basis point cut, which would take the benchmark refinancing rate to 2.75 per cent, the lowest in more than two years.
Economic projections made by ECB staff are also due to be updated on December 4th, with analysts expecting euro zone growth and inflation estimates to be cut for this year and next.
ECB Governing Council member Axel Weber said the ECB has plenty of room to lower interest rates further, with inflation likely to drop well below its 2 per cent ceiling in 2009.
"The receding inflation pressure has created ample room to move for European monetary policy, which will be also used given the rapidly deteriorating economic outlook," in a speech in Berlin.
ECB President Jean-Claude Trichet said the Governing Council would have a lot of new information to consider when it meets next Thursday. "We did not exclude to decrease rates again if the upside risk to prices alleviate," he told a news conference in Cairo, echoing a statement made after the November meeting.
Euro zone inflation has fallen from a peak of 4 per cent in the summer to 3.2 per cent in October and is set to drop further.
"Easing inflation is the best economic stimulus programme at the moment. It supports purchasing power," Postbank economist Marco Bargel said.
Other ECB policymakers have also made clear they would support a further loosening of monetary policy, following two 50 basis point cuts since early October.
Slovenian central bank president Marko Kranjec said euro zone is now in a period of significantly lower inflation and growth in the region could be negative.
"We are going through period of significantly lower inflation and a significantly lower level of economic growth which may be even negative," Mr Kranjec said.
Reuters