The European Central Bank has more room to cut interest rates toa record low early next year after reports showed the sovereigndebt crisis is damping inflation pressures.

The rate of growth in M3 money supply, which the ECB uses as agauge of future inflation, fell to 2 percent in November from 2.6percent in October, the Frankfurt-based central bank said today.Growth in loans to households and companies across the 17-nationeuro area also slowed, while inflation in Germany, the region'slargest economy, decelerated in December.

The data reinforce the view “that underlying inflationarypressures are easing and that the ECB has ample scope to cutinterest rates again in the early months of 2012,” said HowardArcher, chief European economist at IHS Global Insight in London.“Euro-zone inflation is poised to retreat markedly over the comingmonths.”

The ECB lowered its benchmark rate to 1 percent in December,matching the record low, and stepped up efforts to flood thebanking system with cash as the debt crisis threatened to engulfItaly and Spain. It may take its key rate into uncharted territorywithin months as the economy teeters on the brink of recession,according to economists such as Jacques Cailloux at Royal Bank ofScotland Group Plc.

Italian business confidence fell to the lowest in two years thismonth as the region's third-largest economy probably entered itsfourth recession in the past decade amid a wave of austeritymeasures designed to fight the debt crisis. Themanufacturing-sentiment index dropped to 92.5, the lowest sinceDecember 2009, from 94 in November, Rome-based national statisticsinstitute Istat said today.

The euro slid to a decade low against the yen and the lowestagainst the dollar since September 2010 as Italy sold three- and10-year government bonds. European stocks erased gains, leaving theStoxx Europe 600 Index little changed at 1 p.m. in London.

The euro and global stocks fell yesterday after the ECBpublished a report showing its balance sheet swelled to a record2.73 trillion euros ($3.55 trillion) on increased lending toeuro-area banks, highlighting risks from the debt crisis.

ECB policy makers next decide on interest rates on Jan. 12. Allbut one of 21 economists in a Bloomberg News survey expect them tohold rates steady at that meeting.

The central bank on Dec. 8 predicted that growth will slow tojust 0.3 percent in 2012 from 1.6 percent in 2011. Inflation willaverage 2 percent next year — its definition of price stability —after 2.7 percent this year.

German Inflation

German inflation eased to 2.4 percent this month from 2.8percent in November, the nation's statistics office said today.

“German inflation will come down pretty rapidly now and willprobably be lower than the euro-area average next year,” saidCailloux, chief European economist at RBS in London. “This willmake it easier for the ECB to keep cutting interest rates.”

Cailloux forecasts policy makers will lower the key rate to 0.5percent by the end of the first quarter, with two quarter- pointsteps in February and March.

The annual growth rate in loans to European households andcompanies slowed to 1.7 percent in November from 2.7 percent inOctober, the ECB said today.

Euro-area inflation will slow to 2.8 percent this month from 3percent last month, according to the median of 24 estimates in aBloomberg survey. That report is due on Jan. 4.

In the U.S., a Labor Department report at 8:30 a.m. New Yorktime may show that initial jobless claims climbed to 375,000 lastweek after falling to the lowest since April 2008 in the previousperiod, according to the median forecast of 32 economists surveyedby Bloomberg News.

Separate data may show U.S. pending sales of previously ownedhomes rose 1.5 percent in November after a 10 percent jump in theprior month, economists said before the report at 10 a.m. from theNational Association of Realtors.

In Germany, the economy will probably avoid a recession even asorders from its main euro-area trading partners wane during thedebt crisis, two economic institutes that advise Chancellor AngelaMerkel's government said on Dec. 20.

“If the economic outlook darkens further, interest ratereductions toward 0.5 percent are conceivable,” said Marina Luetje,an economist at Dekabank in Frankfurt. “Our main scenario forinterest rates is that the economic outlook doesn't worsen further,in which case the ECB will leave its main rate at 1 percent untilthe middle of 2014.”

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