Euro zone PPI in record fall, firms case for rate cut

By Jan Strupczewski

BRUSSELS (Reuters) - Euro zone producer prices logged a record monthly fall in November as energy costs sank, showing inflation could be heading uncomfortably lower for the European Central Bank and firming the case for a rate cut next week.

Prices at factory gates in the 15 countries using the euro in November fell 1.9 percent month-on-month for a year-on-year rise of 3.3 percent, the European Union statistics office, Eurostat, said on Wednesday.

The 1.9 percent monthly decline was the biggest since Eurostat records for producer prices began in 1981, the office said. Economists polled by Reuters had expected a 1.0 percent monthly fall and a 4.3 percent annual rise.

"Given widespread evidence of sharply diminishing inflationary pressures and deepening euro zone recession, we believe there is a compelling case for the ECB to cut interest rates appreciably ... at its 15 January policy meeting," said Howard Archer, economist at IHS Global Insight.

Markets have fully priced in a 50 basis point cut by the ECB next week, though ECB President Jean-Claude Trichet has said the bank's cumulative rate cuts of 175 basis points to 2.5 percent since October have yet to show their effect.

But rapidly falling consumer inflation, which dropped to 1.6 percent year-on-year in December against the bank's target of just below 2 percent, has also triggered remarks from ECB officials that price growth must not slow too much below target.

Executive Board member Jose Manuel Gonzalez-Paramo said on Wednesday the bank would continue to set monetary policy "orientated towards its credibility in guaranteeing medium term price stability" -- which is just below 2 percent.

ECB Governing Council member Vitor Constancio said on Tuesday the bank should preemptively cut interest rates to avoid inflation falling too far below 2 percent. ECB Vice-President Lucas Papademos said on Sunday more rate cuts may be needed to make sure inflation did not fall too far.