ECB sees inflation in line with target

BRUSSELS (Reuters) - Euro zone inflation is likely to fall in line with the European Central Bank's target and might go further but only briefly, President Jean-Claude Trichet said on Thursday after the bank cut interest rates by a record 75 basis points.

Trichet acknowledged a significant slowdown in the euro zone economy and said he could not rule out a faster fall in the inflation rate around mid-2009.

However, any sharp fall should be short-lived, and would not be relevant for interest rates, he told a news conference.

"Inflation rates are expected to be in line with price stability over the policy-relevant horizon, supporting the purchasing power of incomes and savings," he said. "The decline in inflation rates is due mainly to the fall in commodity prices and the significant slowdown in economic activity."

Euro zone inflation plunged by 1.1 percentage points in November, the biggest drop since the euro zone was created 10 years ago, to 2.1 percent year-on-year.

This was only just above target as the ECB aims to keep inflation below, but close to, 2 percent.

"Largely related to the effects of the intensification and broadening of the financial turmoil, both global demand and euro area demand are likely to be dampened for a protracted period of time," he added.

Some economists have talked about the threat of deflation hitting the euro zone.