Eurozone annual inflation slowed more than expected in March, adding to concerns of possible deflation and giving room for the central bank to cut rates further.

According to a flash estimate from the Eurostat, Eurozone annual inflation halved to 0.6% in March from 1.2% in February. Inflation has slowed to its lowest level since the launch of euro ten years ago. Economists had expected annual inflation to ease to 0.7% in March.

The central bank targets inflation rate of below, but close to 2% over the medium term. In March 2009, the European Central Bank had lowered its key interest rate by half a percent to a record low of 1.5%, as economic slowdown deepened. The central bank is expected to cut rate further to 1% this week.

The statistical office is set to release the final CPI report on April 16.

In March, the Spanish EU harmonized consumer price index declined 0.1% from the previous year. Thus, Spain became the first nation in the EU 16 to report a year-on-year slide in consumer prices. Meanwhile, the Italian consumer price index including tobacco rose 1.2% year-over-year in March, slower than the 1.6% increase in the previous month.

Rainer Guntermann, an economist at Dresdner Kleinwort expects the inflation rate to dip below zero this summer. This would not actually be a sign of deflation, but concerns about deflation would increase, overshadowing long-term inflation concerns. Core inflation would have fallen to 1.6% this month compared to 1.7% in February.

Yesterday's consumer survey revealed that consumers are aware of easing inflation. Though slowing inflation is a welcome stabilizer for trend in private consumption, this is outweighed by mounting concern about job security. Even if consumer prices fall during this summer, this would not necessarily herald deflation, the economist said. With very weak economic activity, concern over a lasting decline in prices remains.

At present, fears of higher inflation as a result of expansionary monetary and fiscal measures are a matter of secondary consideration.

Along with interest rate cut, the central bank is also expected to adopt additional unconventional measures, possibly in the area of credit easing over the months ahead, the economist added.

Elsewhere, a report from the Centre for Economic Policy Research showed that the Eurozone fell into recession since the beginning of 2008. Economic activity in the euro area peaked in the first quarter of 2008, putting an end to an expansion that began in the third quarter of 1993 and lasted 57 quarters.

The gross domestic product dropped 1.5% sequentially in the fourth quarter of 2008, the weakest GDP figure since records began in 1995. The Eurozone economy entered recession in the third quarter of 2008 by shrinking 0.2% following a 0.3% fall in the second quarter of last year. Two quarterly declines in GDP in a row denote recession.

The Organization for Economic Co-operation and Development projects Eurozone GDP to drop 4.1% in 2009 and 0.3% in the next year. The recovery will only begin to build momentum by the middle of 2010.

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