German inflation fell to its year-low in September, and to just a sliver above the European Central Bank's 2 per cent ceiling, confirming price pressures in the euro area were abating amid mounting economic gloom.

Preliminary data released by the Federal Statistics Office yesterday showed German annual inflation dropped to 2.1 per cent from 2.6 per cent in August, with prices unchanged month-on-month. The figures were in line with market expectations and analysts said the data confirmed the price outlook for the whole of the euro zone were improving and the ECB did not have to lose sleep over inflation even after its sharp interest rate cuts.

The ECB meets on Thursday and is widely expected to keep its benchmark 3.75 per cent rate on hold. However, the data increase the prospect of further cuts in European interest rates down the line.