German Inflation Rate Plunges to Lowest in More Than Two

Germany’s inflation rate slumped to the lowest in more than 2 1/2 years in April, just days before the European Central Bank is due to decide on interest rates.

The inflation rate in Europe’s largest economy, calculated using a harmonized European Union method, fell to 1.1 percent from 1.8 percent in March. That’s the lowest since August 2010. Economists predicted a slowdown to 1.7 percent, according to the median of 19 forecasts in a Bloomberg News survey. Prices dropped 0.5 percent in the month.

“Today’s data lay the groundwork for the ECB to cut interest rates this week,” said Jens Kramer, an economist at NordLB in Hanover. “Inflation in the euro area will slow faster than expected, and with economic sentiment worsening it will play into the hands of those arguing for lowering borrowing costs.”

ECB policy makers, who are due to convene on May 2 for their monthly meeting, have signaled they’re open to reducing interest rates to stimulate growth and get the 17-nation euro economy out of recession. Economists brought forward expectations for a cut after gauges of manufacturing and services activity for April underscored weakness in output.

Economic Confidence

Economic confidence in the euro area decreased more than economists forecast in April, the European Commission in Brussels said today, a week after the Bundesbank cast doubt on a first-quarter recovery in Germany.

ECB President Mario Draghi said on April 19 that economic risks are still on the downside and that the situation hasn’t improved this month.

Some 44 of 70 economists in a Bloomberg News survey forecast policy makers will cut interest rates this week. The benchmark rate is already at a historic low of 0.75 percent.

Germany’s weaker-than-forecast reading may push euro-area inflation lower than economists predict. In a survey conducted before today’s data, they estimated the rate would fall to 1.6 percent from 1.7 percent last month. The EU’s statistics office in Luxembourg will publish that report at 11 a.m. tomorrow.

Risks to the outlook for inflation “continue to be broadly balanced,” Draghi said after the last rate decision on April 4. The ECB in March cut its inflation projection for 2014 to 1.3 percent from 1.4 percent and predicted annual consumer-price gains will average 1.6 percent this year. It aims to keep inflation just below 2 percent.

For Germany, the Bundesbank forecasts inflation will average 1.5 percent this year and 1.6 percent in 2014. Germany’s non-harmonized rate fell to 1.2 percent in April from 1.4 percent in March, today’s report showed.

“German inflation has reached its low point and should start rising again next month,” said Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt. “But we won’t see inflation rates above 2 percent before next year. Moderate price pressures give the ECB room to act.”

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