(RTTNews) - Eurozone annual inflation reached the lowest level in more than 24 months in December on falling fuel prices, official data showed Tuesday. Raising chances of further rate cuts, inflation fell below the central bank target for the first time since August 2007.

According to flash estimate, consumer price inflation slowed for the fifth straight month to 1.6% in December from 2.1% in November. The inflation rate stood below the expected rate of 1.8% and central bank’s target of below, but close to 2% over the medium term.

The Eurostat is scheduled to publish the final numbers on January 15. On the same day, the European Central Bank is set to hold its Governing Council meeting.

Earlier in the week, ECB Vice President Lucas Papademos said the central bank may be in need of further rate cuts in the wake of falling inflation. Papademos noted that interest rate cuts could be warranted if price stability is threatened by weakening inflation.

Since October, the ECB has already reduced its benchmark interest rates by 175 basis points to 2.5%. Economists forecast another cut of at least 50 basis points in its next meeting on January 15.

The Eurozone economy had entered its first recession since the adoption of Euro by contracting 0.2% sequentially in the third and the second quarters of 2008.

Papademos said the euro-area economy is likely to remain weak in 2009, adding that it may even contract in the first six months. With regard to inflation, he said the rate is expected to fall notably in the first half of the year with no risk of deflation.

Christoph Weil, an economist at Commerzbank expects the central bank to cut the key rate in the coming few months by a further 150 basis points to 1%. Weil added that inflation would possibly be close to zero in the spring. The more gradual rise in consumer prices is strengthening consumers’ spending power and giving the ECB scope to cut rates quickly again.

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