The annual rate of inflation fell to just 2.1 per cent at the end of November as mortgage interest cuts impacted on the figures.

Overall, consumer prices fell by 0.4 per cent in November compared to the previous month, according to figures published by the Central Statistics Office (CSO) yesterday.

The year-on-year fall to 2.1 per cent brings inflation to its lowest level since last March.

The figures will provide reassurance for the Minister for Finance following his generous Budget last week and for the Central Bank, which cut interest rates to just 3 per cent in recent weeks.

Yesterday's cut in British interest rates also underpins the low inflation environment, pointing to weakness in the British economy and a likely further weakening in sterling over the longer term.

This is likely to hold inflation in check here as the price of imports from Britain will remain lower.

The main component of the monthly fall in prices was the cut in mortgage repayments due to lower interest rates which, the CSO calculated, knocked 4.1 per cent of housing costs.

Further rate cuts, led by the Irish Permanent and which should be followed by the other lenders over the next couple of weeks, will lead to another drop in December's consumer price index (CPI) figure.

According to Mr Jim Power, chief economist at Bank of Ireland, the inflation rate should now fall to 1.9 per cent in December and possibly lower.

But as Mr Austin Hughes, economist at the Irish Intercontinental Bank pointed out, the intense competition in retailing, increasing competition in telecommunications and powerful deflationary impulses from the world economy were also helping the figures.

Importantly, food prices also fell in November, mostly as a result of cuts in meat prices in supermarket chains. Services were also down 0.1 per cent largely due to cuts in telephone charges.

On the other hand clothing and footwear were up 0.8 per cent as were household durables, with retailers putting up prices in anticipation of Christmas shopping.

On an EU-harmonised basis - a calculation which excludes mortgage interest rate costs and is designed to allow rates to be compared across the EU - inflation showed no monthly change in November and is up 2.2 per cent since November 1997.

According to Mr Power, the low number masks the real inflation in the economy in areas such as labour costs, where price rises are coming through.

"This does not provide any comfort for those who believe we will not overheat," he said. "Companies facing higher input costs through higher wages will not be able to pass on price rises and will only be able to squeeze margins or cut costs. Ultimately that will cost jobs."

According to Dr Dan McLaughlin, chief economist at ABN-Amro, the Department of Finance's forecast of a 2 per cent average inflation rate in 1999 now looks correct. "This puts the simplistic notion of overheating into context. All the academic evidence suggests that inflation here is determined by world price trends and currency movements. The pound has risen by 11 per cent from May against sterling and 5 per cent in trade-weighted terms. World prices are also very subdued and that is winning out."

While the CSO includes a "housing costs" element in its index - which has fallen due to the drop in mortgage rates - its calculation does not include house prices, which are excluded from the consumer price index. Recent figures have shown that house prices have risen sharply over the past year.