Euro inflation hits two-year low

Inflation has fallen sharply from its July peak of 4%

Inflation in the eurozone fell by more than expected in December to 1.6%, from November's figure of 2.1%, according to the EU statistics office Eurostat.

December's consumer prices figure was well below the European Central Bank's (ECB) target rate of just under 2%.

Analysts said that the fall was largely down to the decline in oil prices, compared with the same month in 2007.

The 26-month low figure makes it more likely that the ECB will cut interest rates again at its 15 January meeting.

It has already cut rates from 4.25% to 2.5% since October, as inflation has dropped from its July peak of 4%.

Shrinking services

"Sharp falls in energy and food price inflation were probably again the main driving forces," said Nick Kounis at Fortis Bank.

"If oil prices remain at current levels, headline inflation is likely to continue to fall sharply, reaching a low of around 0.5% in June."

There were further indications of why the rate cut is needed with the release of figures showing that the eurozone service sector shrank sharply in December.

The Markit Eurozone Purchasing Managers' Index, which polls 2,000 service sector companies, fell to 42.1 in December from 42.5 in November.

Any figure below 50 indicates a contraction in the sector.

"There is a very high chance the ECB will cut soon," said Sunil Kapadia at UBS.

"We have a forecast of the ECB going to 1% by the middle of the year but with this kind of data the likelihood of going to 1% even sooner is increasing rapidly."