(RTTNews) - Eurozone annual inflation slowed in June and remained within the central bank target, giving relief to policy makers. With no inflationary threat on the horizon, the European Central Bank has much scope to leave the interest rate unchanged at a record low in the months ahead to support the fragile economic recovery. Consumer prices rose 1.4% annually in June, down from the 1.6% increase seen in May, according to a flash estimate issued by Eurostat, the statistical office of the European Union. This came slightly below economists' forecasts for a 1.5% inflation rate. The statistical office is set to issue the detailed report on July 14. The ECB targets inflation rates of 'below, but close to, 2%' over the medium term. Although inflation could temporarily stay somewhat higher later this year due to higher import prices caused by the weaker euro, it is likely to hover around current levels in the near term, commented ING Bank NV economist Martin van Vliet. Headline inflation is set to stay below the ECB's target through 2011 and possibly through 2012, the economist added. The decrease seen in inflation was due to energy base effects, said BNP Paribas economist Clemente De Lucia. On the other hand, core inflation which accounts for around 70% of the index, was probably stable at 0.8% in June, the economist added. BNP Paribas expects an increase in inflation in the coming months due to rising commodity prices and the depreciation of the euro. Prices will be driven up by the government and the weak euro in the next few months, said Commerzbank analyst Christoph Weil. The economist noted that Eurozone has price stability according to ECB definition and there will be little change either on a one to two-year horizon. The ECB has been retaining the key interest rate at a historic low since the middle of 2009. The last change in the rate was in May 2009, when the bank cut the rate by 25 basis points to the current level of 1%. In an interview with Italian newspaper La Repubblica, ECB President Jean-Claude Trichet said Eurozone is unlikely to face deflationary risks and the austerity measures will not lead to stagnation. Regarding euro, he said it is a credible currency. "A currency which safeguards price stability is a major asset in the eyes of investors, both domestic and international," Trichet said. The retreat in Eurozone consumer price inflation in June reinforces belief that any interest rate hike by the ECB is a long way off, noted Howard Archer, an economist at IHS Global Insight. As such, the economist expects the central bank to keep interest rates down at the current level of 1.00% not only through 2010 but deep into 2011. A rate hike is seen in the fourth quarter of 2011 to 1.5%.

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