Euro zone inflation eased from last year's peaks of 3.0 per cent in December, the first sign of a fall in price growth this year that analysts expect will create room for more interest rate cuts to help the weakening economy.

The European Union's Statistics Office (Eurostat) estimated that consumer prices in the 17 countries sharing the euro rose 2.8 per cent year-on-year in December, down from 3.0 per cent year-on-year rises in November, October and September.

No detailed break-down of the numbers is available with the Eurostat estimate, but economists said the slower price growth was likely a result of lower energy prices.

"Looking ahead, further falls in inflation are likely," said Ben May, economist at Capital Economics.

"Assuming that the oil price does not rise again, we see this component knocking about 1 per cent off the headline rate in 2012. Food inflation should also slow as the effects of past rises in agricultural commodity prices fade," he said.

"We expect the headline inflation rate to plunge well below the ECB's 2 per cent price stability ceiling by the middle of the year," he said.

The European Central Bank cut its main interest rate back to a record low of 1 per cent on December 8th to try to boost the economy as inflation pressures subside. Economists believe that with inflation falling, more interest rate cuts were likely soon.

"The favourable medium-term inflation outlook is a green light for further ECB rate cuts over the coming months. We expect the refinancing rate to reach a low of 0.5 per cent," said Nick Kounis, economists at ABN Amro bank.

Cheaper credit could help boost growth in the euro zone, where the economy expanded just 0.2 per cent in the third quarter and economists expect that it contracted in the fourth.

They also think it might contract in the first three months of 2012, which would send the region back into recession after a two-year recovery from the worst global financial crisis since the 1930s.

"Consequently, we expect the ECB to respond to likely euro zone GDP contraction in the fourth quarter of 2011 and the early months of 2012 by cutting interest rates further," said Howard Archer, economist at IHS Global Insight.

"Specifically, we forecast the ECB to trim interest rates by a further 25 basis points from 1.00 per cent to 0.75 per cent in the first quarter although we do not expect another cut as soon as the January 12th policy meeting," he said.

Reuters