Low inflation sets up ECB rate cut

Mario Draghi, president of the European Central Bank, has breathing space to cut eurozone interest rates to a new record low as the threat of rising prices fades, experts said yesterday.

Inflation held steady at 2.7 per cent across the single currency bloc in January, officials said – down on last August's recent peak of 2.9 per cent. The rate is still well above the ECB's target of just below 2 per cent, but set to fall back towards the target in the coming months as the region feels the impact of recession.

Analysts said the looming fall gave Mr Draghi room to cut borrowing costs to an all-time low of 0.75 per cent in February or March. The ECB chief has cut rates twice since taking over from Jean-Claude Trichet in November, and pumped nearly €500bn into the European banking system in December.

Martin van Vliet, ING Bank economist, said: "We expect overall inflation to drop well below 2 per cent around the middle of this year. The prospect of below-target inflation allows the ECB room for manoeuvre to cut its main policy rate further. Although the ECB is now in a wait-and-see stance and looks set to keep rates on hold next week, there remains a chance of additional rate cuts over the coming months."