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Euro zone July inflation stable as economy slows

A machine counts and sorts out euro notes.

YVES HERMAN/REUTERS

Falling communications prices helped keep euro zone consumer inflation stable in July, giving the European Central Bank (ECB) space to cut interest rates amid a worsening economic climate.

Consumer inflation in the 17-nation euro zone was 2.4 per cent in June on an annual basis, the EU statistics office said on Thursday, confirming its earlier estimate. Inflation in the zone has now been at 2.4 per cent for three months in a row, the lowest level for 16 months.

Eurostat said housing prices had risen 3.8 per cent in July from the same month in 2011, while transport costs were up 3.2 per cent and alcohol and tobacco up 4.7 per cent. Prices for communications were down 3.1 per cent.

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The biggest upward impacts on the headline rate came from fuels for transport, added 0.13 percentage points, and electricity and gas, which each added 0.10.

Telecommunications subtracted 0.18 percentage point and cars 0.06 percentage point.

The price data came two days after the announcement that the euro zone economy contracted by 0.2 per cent in the second quarter, with economists saying the zone was likely to enter recession in the current, third, quarter.

The bad data for the zone's debt-ravaged economy are fuelling expectations that ECB president Mario Draghi could cut its key rate below its current record low of 0.75 per cent.

Mr. Draghi said the bank's policymakers discussed the possibility of cutting interest rates at their meeting on August 2, but that the Governing Council "in its entirety decided this was not the time".

Bank-to-bank lending rates hit fresh all-time lows on Monday, extending a downtrend that began with the ECB flooding financial markets with liquidity late last year and is now plumbing new depths on expectations of an ECB rate cut.

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