Inflation in Germany rose less than expected in December, fueling hopes that the European Central Bank (ECB) may reduce interest rates this year.
According to Germany’s federal statistics office, annual headline inflation, adjusted to harmonize with other EU nations, climbed to 3.8% last month from November’s 2.3%. However, experts attribute this jump to base effects related to energy relief measures implemented in December of the previous year. Notably, the increase was lower than the 3.9% level predicted in a Bloomberg survey.
Conversely, annual core inflation, which excludes volatile energy and food prices, declined from 3.8% in November to 3.5%. Analysts suggest that this deceleration, along with a French prices report released earlier on Thursday, is a positive sign for euro-zone inflation data expected on Friday.
Andrew Kenningham, chief European economist at Capital Economics, predicts that the euro-zone headline and core inflation rates will align closely with their forecast of 2.9% for headline and 3.3% for core inflation. This is likely to reinforce market expectations for the ECB to commence a gradual reduction in borrowing costs by spring.
“We maintain our view that the ECB is most likely to begin cutting interest rates around April and that the deposit rate will decrease by approximately 125 basis points to 2.75% by year-end,” stated Kenningham.
Following the data release, the euro experienced minimal changes, gaining 0.2% on the day to $1.0943. Meanwhile, German 10-year bond yields, the euro-zone benchmark, had already been climbing in line with U.S. treasury yields, rising by 9.6 basis points to 2.121%.
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