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Eurozone inflation falls, may help pause rate hikes

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Eurozone year-on-year inflation slowed unexpectedly in July, the first official estimate showed on Friday, casting new doubt on whether the European Central Bank will raise interest rates again this year.

The European Union's statistics office Eurostat estimated that consumer prices in the 17 countries using the euro grew 2.5 percent year-on-year in July, after increasing 2.7 percent in June. The Eurostat estimate does not provide monthly price growth data or any breakdown of the numbers.

"While a further interest rate hike in the fourth quarter is clearly very possible, we suspect that slowing Eurozone growth and recurrent sovereign debt problems will present an increasingly compelling case for the ECB to hold off from further monetary policy tightening this year," said Howard Archer, economist at IHS Global Insight.

"We also anticipate that the case for further ECB action in 2011 will be diluted by mounting evidence that the second round inflationary effects from higher energy and commodity prices are being contained," he said.

"We currently expect the ECB to keep interest rates at 1.50 percent through the rest of 2011 and lift then lift them gradually further to 2.25 percent by the end of 2012," Archer said.

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