BERLIN, Oct 29: Falling oil and food prices helped cool German inflation for the third month in a row in October, giving the European Central Bank added scope to cut interest rates and bolster the broader euro zone economy.

The annual inflation rate in six German states slowed by between 0.3 and 1.3 percentage points compared with September, figures released on Tuesday and Wednesday showed.

Data for the six states are used to calculate a preliminary inflation figure for Germany, which the Federal Statistics Office is due to release later on Wednesday. The state data also gives the first insight into price trends across the euro zone.

“In our view, the ECB can cut rates again against this backdrop,” said Matthias Huth, an economist at LBBW.

The ECB, which will hold its next rate-setting meeting on Thursday of next week, cut its benchmark rate to 3.75 per cent on Oct 8 in a coordinated move with other major central banks.

“Next week the ECB will probably cut interest rates. Further rate cuts will probably follow to the tune of 100 basis points in total,” said Ulrike Kastens, an economist at Sal Oppenheim.“The financial crisis is slowly eating into the real economy.” Inflation in the six states lay between 2 per cent in Hesse and 2.7 per cent in Saxony, Bavaria and Baden-Wuerttemberg.

The ECB has raised the prospect of a rate cut next week, but at 3.6 per cent in September, inflation in the euro area remains well above the bank’s target level of just under 2 per cent.

The consensus forecast from a Reuters poll of economists was that euro zone inflation would slow to 3.2 per cent this month. A flash inflation estimate is due to be published on Friday.

DOMESTIC DEMAND:Unicredit economist Alexander Koch said falling oil prices meant the German outlook for disposable income was brightening, possibly sowing the seeds for a recovery in domestic demand.

“A sustained oil price decline to $50 per barrel would bring down average inflation even below 1 per cent next year,” he said.

Falling prices have buoyed household morale. The GfK market research group said on Tuesday that German consumer confidence steadied going into next month as households’ relief at falling inflation rates offset concerns that a recession may be looming.

Month-on-month, prices fell in the states by between 0.1 per cent and 0.7 per cent, chiefly led by cheaper fuel and seasonal foods, figures showed on Tuesday and Wednesday.

In Hesse, the annual inflation rate slowed 1.3 percentage points, largely due to the abolition of study fees by the state’s parliament one year after they were introduced.

Germany’s national gauge of consumer prices (CPI) -- due to be published later on Wednesday -- was seen dipping by 0.2 per cent on the month. The annual inflation rate was expected to slow to 2.4 per cent from 2.9 per cent in September.

The EU-harmonised price index (HICP) was seen falling by 0.2 per cent on the month. Prices were tipped to rise 2.6 per cent on the year -- down from 3 per cent in the previous month.

The ECB has said it expects inflation in the euro zone to ease as the year progresses, but continues to stress the need to keep price pressures across the bloc in check.

Amid growing concern about the economic outlook and turmoil on financial markets, ECB President Jean-Claude Trichet has said the bank could cut interest rates again when it meets on Nov 6.

Recession fears were stirred again on Monday when a closely watched business survey showed corporate expectations in Germany, Europe’s biggest economy, slumping to their lowest level since the country reunified in 1990. —Reuters