European inflation drops to lowest in 2 years

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: respond with interest-rate reductions,” ECB council member Vitor Constancio said in Lisbon on Monday. His pledge echoes comments by ECB Vice President Lucas Papademos on Jan. 4 that lower borrowing costs “could be warranted” if price stability were threatened. “In the wake of recent developments, it is now more open whether the governing council will lower the policy rate on January 15,” Julian Callow, chief European economist at Barclays Capital in London, said in a Jan. 2 note to clients. Investors indicate they expect a cut of at least 50 basis points at the January 15 meeting, according to Eonia forward contracts.

Last month, ECB President Jean-Claude Trichet said policy makers were wary of being “trapped” with interest rates too low, while Bundesbank President Axel Weber has said he “would like to avoid” taking the key rate below 2%. The inflation report released is an estimate. The statistics office will publish a detailed breakdown of the data, including energy-price inflation as well as the core rate, on January 15.