Euro-zone inflation rose further above the European Central Bank's target of 2 per cent last month, reaching its highest level since April.Higher oil prices were a key driver in the move, which saw inflation in the 12-member currency zone reach 2.2 per cent in September, up from 2.1 per cent in August and slightly higher than expectations.

The figure, issued by EU statistical agency, Eurostat, is based on initial data from Germany, Italy, France and Belgium.

Mr Dermot O'Brien, chief economist with NCB, said the rate would not in itself be a cause of great concern for the ECB. When taken in combination with the continued concern over a war in Iraq, however, he said the inflation numbers could make the ECB feel "uncomfortable" on interest rates.

Adding to this pressure yesterday was additional Eurostat data showing that the euro-zone economies posted a collective deficit of 1.4 per cent last year, 0.1 per cent above previous estimates.

Within this, the Republic achieved a surplus of 1.5 per cent, while one state - Portugal - breached the ECB's 3 per cent target with a rate of 4.1 per cent. Germany ran a deficit of 2.8 per cent, while France and Italy had deficits of 1.4 per cent and 2.2 per cent respectively. It is generally expected that this year's deficits will be larger, as slow growth affects tax revenues and increases welfare spending.

In 2000, the euro zone posted a surplus of 0.2 per cent.

Mr O'Brien said the deficit level would act as an "obstacle" between the ECB and a rate cut in the near term.

"It's just like inflation: it's an issue in the background that's not moving in the right direction."

He acknowledged, however, that a war in Iraq, and its probable effect on oil prices, would act as an "overriding factor".

Mr Alan McQuaid, chief economist with Bloxham Stockbrokers, agreed that an imminent rate cut was unlikely, noting that a concerted global effort would probably be needed before any move downward would be made.

"I don't see them moving off their own bat," he said, noting, however, that the US monetary authorities may be reluctant to cut interest rates ahead of a war in Iraq.