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Fall in German inflation boosts hopes of ECB rate cut

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German inflation fell more than forecast in March, bolstering hopes that the European Central Bank will soon start cutting interest rates as the worst cost of living crisis for a generation subsides.

Consumer prices in Germany rose 2.3 per cent in the year to March, down from 2.7 per cent a month earlier, taking inflation in Europe’s largest economy to the lowest level since June 2021, according to data published on Tuesday. Falling energy and food costs and slower goods inflation offset an acceleration of services prices.

Economists polled by Reuters had forecast a slightly higher reading of 2.4 per cent for March. Core inflation, excluding energy and food, slipped from 3.4 per cent to 3.3 per cent.

The German figures, which follow lower than expected rises in France, Italy and Spain last week, add to hopes that eurozone-wide inflation will also continue falling in March when those numbers are released on Wednesday.

The ECB is expected to leave its benchmark deposit rate at a record high of 4 per cent for a seventh consecutive month when it meets next week, after policymakers signalled that June was the earliest they were likely to cut borrowing costs.

Even though inflation is falling tantalisingly close to their 2 per cent target, rate-setters have said they want to wait to see whether wage pressures continued to ease in the first quarter. That data will only be released between next week’s meeting and the subsequent one on June 6.

Carsten Brzeski, an economist at Dutch bank ING, said: “Wage developments remain key and as long as the economy doesn’t fall off a cliff, the ECB will sit tight next week, waiting for more data and the June meeting.”

ECB president Christine Lagarde said last month that first-quarter wage data and the bank’s new forecasts to be published in June were the “two important pieces of evidence that could raise our confidence level sufficiently for a first policy move” to cut rates.

However, some members of the ECB’s 26-person governing council have hinted they could push for a rate cut at next week’s meeting if inflation continues to fall faster than expected and the eurozone economy remains stuck in the doldrums.

“We must not ignore the risk of weighing excessively on activity by keeping our foot pressed on the monetary brake for too long,” French central bank governor François Villeroy de Galhau said last week. He added that the “time has come” to start cutting rates, even if the “exact date of the first cut — April or early June — has no existential importance”.

Rate-setters will have drawn comfort from the ECB’s quarterly survey of consumers, which found their median inflation expectations for the next 12 months had fallen from 3.3 per cent to 3.1 per cent — the lowest reading since the start of Russia’s full-scale invasion of Ukraine two years ago.

Germany’s statistics agency said energy prices fell 2.7 per cent in the year to March despite the expiry of price brakes on gas and electricity bills at the start of the year. It said the 0.7 per cent fall in food prices was the first such decline since 2015. 

The rise in German services inflation had been predicted by economists due to the earlier timing of Easter, which was expected to raise prices of package holidays and flights.

On a month by month basis, German consumer prices rose 0.6 per cent in March, slightly below economists’ forecasts of 0.7 per cent.

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