Lower Euro Zone Oct Inflation Points to Rate Cut

The euro zone's annual inflation rate fell to 3.2 percent in October, the European Union's statistics office said on Friday, boosting expectations of a big rate cut next week to cushion a likely recession.

The European Central Bank meets on Nov. 6 and most economists polled by Reuters expect a 50 basis point cut as central banks across the world seek to temper the economic damage from the worst financial crisis in 80 years.

"It helps them (the ECB) to cut by 50 basis points next week and by a further 50 basis points not later than January but possibly in December already," said Holger Schmieding, co-head of Europe economics at Bank of America.

Eurostat's year-on-year flash estimate did not include a month-on-month figure or a detailed breakdown of inflation components, which will be made available in mid-November.

Separately, Eurostat said that the euro zone's unemployment rate remained stable at 7.5 percent in September as expected, the same as August but up from 7.3 percent in the same period of 2007, despite the escalation of the global financial crisis.

Employment changes usually lags economic upturns and downturns.

In the euro zone, the jobless rate rose most in Spain, to 11.9 percent from 11.5 percent, and in Ireland, to 6.6 percent from 6.2.

"Looking ahead the unemployment rate is going to creep up. I think unemployment can reach 9 percent in the euro area over the next 2 years or so," said Sunil Kapadia, analyst at UBS.

The rise in euro zone consumer prices slowed from September's 3.6 percent annual growth rate and a peak of 4.0 percent in July.

ECB policymakers said on Thursday euro zone economic growth could be close to zero next year, echoing suggestions of ECB President Jean-Claude Trichet that the bank may lower borrowing costs next week.

Analysts expect the ECB to cut rates by 50 basis points, its second such reduction in less than a month, which would take benchmark credit costs to 3.25 percent.

The European Commission said on Thursday its economic sentiment indicator sank in October to its lowest since 1993 and suffered its sharpest monthly fall on record, suggesting the euro zone is in recession.

The ECB wants inflation to be just below 2 percent over the medium term and the International Monetary Fund believes the target will be reached next year.

Euro zone inflation has been easing in line with falling global prices for oil and other commodities.

Economic contraction, which began in the second quarter, is stifling consumer demand.

"There are also now very clear signs that underlying inflationary pressures are diminishing as weaker economic activity dilutes companies' pricing power," said Howard Archer, economist at Global Insight.

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