German inflation falls, bolstering case for more ECB rate cuts

By Maria Martinez

BERLIN (Reuters) -German inflation fell more than expected in March, data showed on Monday, bolstering the case for policymakers seeking further interest rate cuts at the European Central Bank.

The inflation rate eased to 2.3%, preliminary data from the federal statistics office showed.

Analysts polled by Reuters had forecast a March reading of 2.4%, after a year-on-year increase in consumer prices of 2.6% in February, based on data harmonised to compare with other European Union countries.

"Germany's inflation is gradually approaching price stability, defined at 2%," ZEW economist Friedrich Heinemann said, adding that falling oil prices and a lethargic economy were driving the decline.

The data comes ahead of the euro zone inflation release on Tuesday. Inflation in the bloc is expected at 2.3% in March, unchanged from the previous month, according to economists polled by Reuters.

The ECB has cut interest rates six times since June but has provided few signals about its next move since the most recent reduction of its key deposit rate to 2.5% at the March meeting. The next rate decision is due on April 17.

Germany's figures, together with those from France, Italy and Spain, suggest that euro zone headline inflation will probably come in at 2.2% in March, slightly below expectations, said Franziska Palmas, senior Europe economist at Capital Economics.

"On the margin, this increases the likelihood that the ECB cuts rates again in April, in line with our forecast, rather than pausing," Palmas said.

CORE INFLATION

Core inflation, which excludes volatile food and energy prices, fell to 2.5% in March from 2.7% in the previous month.

This shows that in contrast to the past, this was not primarily due to the price development of energy and food. Services prices rose 3.4% in March, showing a slowdown from the 3.8% increase in February.

"It is apparent that companies in the service sector in particular are finding it increasingly difficult to pass on higher labour costs to their customers in light of the weak economy," said Ralph Solveen, senior economist at Commerzbank.

The economy shrank in the final quarter of last year, reigniting fears of a recession, defined as two consecutive quarters of contraction.

Germany's economic prospects have also worsened after U.S. President Donald Trump announced a 25% tariff on imported vehicles, which is expected to hit German automakers particularly hard.

"The looming escalation of trade tensions and possible European retaliation to U.S. tariffs could add to inflationary pressures in the short run," said Carsten Brzeski, global head of macro at ING.

In the longer run, however, any trade war could also turn into a disinflationary force for Germany and the euro zone if growth were to weaken and companies potentially have to sell their increased inventories, Brzeski added.

Looking ahead, another important driver will still be energy prices, which have been on a rollercoaster ride in recent months, according to Brzeski.

"This is a ride that could easily continue, depending on whether geopolitical tensions soften or escalate," Brzeski said.

(Reporting by Rachel More, Maria Martinez and Ludwig Burger; Editing by Friederike Heine, Hugh Lawson and Ed Osmond)