Euro Zone Inflation Plunges to 1.6% in Dec

Euro zone inflation plunged more than expected to a 26-month low in December, the European Union's statistics office said on Tuesday, raising expectations of another European Central Bank interest rate cut next week.

Inflation in the 15 countries using the euro in December was 1.6 percent year-on-year, Eurostat estimated, down from 2.1 percent in November and well below the ECB target of just under 2 percent.

Economists polled by Reuters had expected a decline to 1.8 percent.

The estimate does not contain a monthly figure or a detailed breakdown, but economists said the fall stemmed mainly from a sharp drop in oil prices compared to the same period of 2007.

The ECB meets to discuss rates on Jan. 15.

Markets have largely priced in a 50 basis point cut, with some investors betting on a 75 basis point move after the last such reduction in December.

The bank has cut rates by 175 basis points to 2.5 percent since October as inflation decelerated rapidly from a July peak of 4.0 percent along with a sharply slowing economy and falling oil prices.

ECB President Jean-Claude Trichet has declined to give any firm indication on whether bets are justified, although ECB Governing Council member Vitor Constancio said the bank would respond with more rate cuts to keep inflation from falling too much below the target.

Copyright 2009 Reuters. Click for restrictions.