Euro-zone inflation was steady at 2.1 per cent in September, strengthening the case for the European Central Bank to push through an early rate cut. The inflation rate, while remaining above the ECB's self-imposed target of 2 per cent, suggests that a rising trend in consumer prices over recent months may have been stemmed.

If this is true, it will support the argument of low-growth states such as Germany which appear to be implicitly calling for a cut.

The new German government yesterday joined France in tacitly urging the ECB to stimulate growth through a reduction in the cost of borrowing.

"Germany certainly needs something," said Mr Alan McQuaid, chief economist at Bloxham Stockbrokers, who expects the ECB to cut at some stage over the next three months.

"I think the pressure will mount on the ECB to do something about it. Something's going to have to give," said Mr McQuaid.

He suggested, however, that the ECB might hold off on a rate cut until euro-zone inflation could be pushed back below the 2 per cent target. The rate has been lingering above the threshold since July.

An ECB bank governor indicated for the first time this week that a rate cut could be forthcoming. Mr Guy Quaden, governor of the Belgian central bank, refused to rule out a cut to reduce "widespread pessimism" when he spoke on Tuesday.

Dr Dan McLaughlin, chief economist at Bank of Ireland, is less certain of the basis for a cut, however, pointing to the core inflation rate in the euro zone, which remained stubbornly high at 2.4 per cent in September. This rate, which excludes energy, food, alcohol and tobacco, may be of more interest to the inflation-watching ECB, according to Dr McLaughlin.

"Personally, I don't think they're going to cut. If they do, they need to be more confident that the underlying inflation is going to move down."

This is unlikely in the near term as low base factors from last year remain in the system, said Dr McLaughlin. If a "window of opportunity" for a cut is to arise, it is most likely to be in January when euro changeover inflation from the start of this year is eliminated from the numbers, he added. The Eurostat figures show that the Republic, with inflation of 4.5 per cent, is still experiencing the most substantial price rises in the EU as a whole.

Germany, the largest economy in the euro zone, had inflation of 1 per cent in September, a rate sufficiently low to merit deflation concerns. The euro zone average of 2.1 per cent, a rate now steady for two months, compares to 2.2 per cent in the same month of 2001.

Among the contributors to September's average, the highest inflation was seen in hotels and restaurants, where prices rose by 4.7 per cent, and education, where the rate was 4.5 per cent. The lowest rates came in communications and energy, where prices fell by 0.7 per cent and 0.4 per cent respectively.

Meanwhile, the European Commission sounded an alarm yesterday over a growing threat to the Stability and Growth Pact, after evidence of deterioration in the public finances of France and Germany came to light.

German Finance Minister Mr Hans Eichel admitted that Germany's public deficit this year was set to exceed the EU target limit of 3 per cent of GDP.

"Any breaching of this threshold requires swift ... action by member-states," said Economic and Monetary Affairs Commissioner Mr Pedro Solbes.

He was speaking after the EU executive recommended that an official warning be delivered to Portugal, which last year breached the 3 per cent deficit ceiling.

"Besides Portugal, the budgetary situation is crucial in France, Germany and Italy," Mr Solbes said. - (Additional reporting AFP)