Euro rate cut hopes on fall in inflation

German consumer price inflation slowed sharply to 0.9 per cent in 1998, reaffirming an absence of inflationary pressure in the euro area and reinforcing expectations of a European rate cut soon.

The Federal Statistics Office said the 1998 inflation rate, which marked a slowdown from 1.5 percent in 1997, was the lowest since pan-German records began in 1991.

Economists said the figures combined with a series of recent gloomy euro area economic data to make a rate cut by the European Central Bank (ECB) likely in the first or second quarters.

But they added that Germany did not face deflation and said inflation would remain low but not fall further in 1999.

Economists are suggesting that the ECB may cut its main refinancing rate by 25 basis points to 2.75 per cent in the first quarter, with a further cut to 2.5 per cent possible in the second quarter.

ECB officials have maintained that the euro area faces neither deflation nor inflation risks and have reiterated over the last month that the ECB's refinancing rate remains on hold for the foreseeable future.