(REUTERS) -- German inflation eased for the third straight month in December, slowing more than expected and adding to a run of data supporting the case for lower interest rates in the Eurozone.

Consumer prices rose 2.1 percent year on year, the lowest reading since March and down from 2.4 percent in November, the Federal Statistics Office said on Thursday.

The rate of inflation is declining more rapidly, said Commerzbank economist Ulrike Rondorf. In January, it should fall below the critical 2 percent mark for the first time in a year.

Eurozone inflation has steadfastly remained above the European Central Bank's target level of just under two percent this year, and the bank raised interest rates twice earlier in 2011.

But mindful of a looming European recession that could usher in another credit crunch, the bank reversed direction to cut interest rates twice in the last two months, since when price pressures have eased.

Annual Eurozone inflation, which held at three percent in November for the third month in a row, is expected to show a fall to 2.8 percent in December when data are published on Jan 4.

Earlier on Thursday in further signs of a slowdown, ECB data showed that loans to private sector firms in the Eurozone fell in November, growth in lending to households slowed and M3 money supply expanded less than expected.

The sharp slowdown in Eurozone money supply growth ... reinforces belief that underlying euro zone inflationary pressures are easing and that the ECB has ample scope to cut interest rates again in the early months of 2012, IHS Global Insight economist Howard Archer said in a note to investors.

According to a Dec.14 Reuters poll, economists expect the next Eurozone rate cut in the second quarter of 2012, while ECB Governing Council member Ignazio Visco suggested in a recent interview the looming slump could usher in lower borrowing costs.

ECB DILEMMA RESOLVED?

For much of this year, the ECB has faced the dilemma of balancing monetary policy for struggling peripheral countries and Germany's strong economy, which recovered swiftly from the 2008/09 financial crisis.

But German growth has also eased over the past few months and many economists are now forecasting a mild slump for Europe's bulwark economy as well as a slowdown in inflation. The Ifo institute expects average 2012 inflation of 1.8 percent.

The median forecast in a Reuters poll of 27 economists for December's national inflation figure was for a 2.2 percent rise.

German annual inflation panned out at 2.3 percent on average in 2011, the Statistics Office said, boosted by higher household energy and fuel costs. This was up from 1.1 percent in 2010.

The national inflation figure is based on data from six out of 16 states that together account for more than half the population. Annual inflation in all six states slowed sharply.

Inflation in Germany's most populous state, North Rhine-Westphalia (NRW), eased to its lowest rate in over a year, just 1.7 percent, data showed on Wednesday.

German consumer prices harmonised to compare with other European Union countries showed a rise of 2.4 percent on the year in December, down from 2.8 percent in the previous month.