EURO ZONE factory prices unexpectedly held steady in April, marking the fourth straight month of weakening inflation pressures and giving the European Central Bank some space to cut interest rates as the continent’s economy slumps.

Prices at factory gates in the 17 countries using the euro were unchanged from the previous month, the EU’s statistics office Eurostat said yesterday, as falling oil prices and the cooling world economy shift the inflation outlook.

Economists had expected a fractional rise. Producer price inflation on an annual basis was also lower than expected at 2.6 per cent in April.

Months of stubborn inflation for households and factories alike appear to be giving way as the currency area’s debt crisis saps the life out of even the bloc’s strongest economies and ricochets into the world economy, knocking down oil prices.

That could change the stance for the ECB, whose ability to cut rates below its record 1 per cent level has been severely limited by oil at $120 a barrel even as the stagnating European economy keeps wage rises in check.

“There is now room for manoeuvre on interest rates,” said Clemente De Lucia, a senior economist at BNP Paribas.

“But is the ECB going to cut rates? The bank may not want to move until it sees European leaders move on solving the crisis.”

Any worsening of the euro zone’s two-year debt saga could push the ECB to cut rates and pour more cheap, long-term funds into the banking system following its earlier €1 trillion stimulus, economists say.

However, ECB president Mario Draghi says it is now up to governments to act to prevent Spain’s banking problems provoking a knock-on effect across the bloc, and he has warned that the central bank cannot fill the policy vacuum.

Still, investor concerns about euro zone leaders’ handling of the crisis and disappointing job and economic growth in the US, China and Brazil have brought crude to below $100 a barrel in recent days.

That could help quieten anxiety in Germany that inflation poses a danger to the euro zone’s biggest economy.

Some economists argue that record low rates may be appropriate for Spain and Greece, which are struggling with recession and unemployment rates approaching 25 per cent, but not for Berlin.

While only a minority of economists expect a rate cut tomorrow at the bank’s monthly meeting in Frankfurt, investors will be listening carefully for any change in tone from Mr Draghi and the ECB’s governing council.

Crucially, energy price inflation at euro zone factories fell 0.1 per cent in April, Eurostat said, having risen sharply in the first three months of the year.

Consumer price inflation also fell more than expected in May after several sticky months where prices were kept high by the cost of energy in the euro zone. It was the lowest level since February 2011, but still above the ECB’s medium-term target of close to, but below, 2 per cent.

A majority of economists see the ECB holding rates until the end of next year, but a growing minority of economists forecast a rate cut before the end of this year.

“Pressure on the ECB to take interest rates below 1 per cent sooner rather than later is mounting,” said Howard Archer, chief European economist at IHS Global Insight.

“We now expect the ECB to trim interest rates in the third quarter, with July a very real possibility,” he said. – (Reuters)