German Inflation Slows, Giving ECB More Room on Rates

By Gabi Thesing and Brian Swint

Oct. 29 (Bloomberg) -- Inflation in Germany slowed more than economists forecast in October as energy prices fell, making it easier for the European Central Bank to lower interest rates.

The inflation rate declined to 2.5 percent from 3 percent in September when calculated using a harmonized European Union method, the Federal Statistics Office in Wiesbaden said today. Economists expected the rate to drop to 2.6 percent, according to the median of 14 forecasts in a Bloomberg News survey. From a month earlier, prices fell 0.3 percent.

The oil price has more than halved since reaching a record $147 a barrel in July, cooling inflation across the 15 countries that share the euro. ECB President Jean-Claude Trichet said this week that the bank may lower borrowing costs again in November after an emergency half-point cut earlier this month.

``The ECB will take a leap of faith and cut by half a percent,'' said Jens Kramer, an economist at NordLB in Hannover. ``The inflation rates are coming down rapidly, the economy is in crisis. When should the ECB cut by that margin if not now?''

The ECB lowered its benchmark rate to 3.75 percent on Oct. 8 in a globally coordinated move, citing diminishing inflation risks. The deepening financial crisis has driven the world to the brink of a recession. The economies of Germany, France and Italy all shrank in the second quarter.

Euro-Area Inflation

Economists expect euro-area inflation to slow to 3.2 percent this month from 3.6 in September, a Bloomberg survey shows. The European Union's statistics arm Eurostat will publish a first estimate on Oct. 31.

The ECB aims to keep the annual rate of price increases just below 2 percent, a goal the central bank may reach by the middle of next year, council member Christian Noyer said earlier this month.

While lower energy costs have boosted household incomes, recession fears are curbing consumers' willingness to spend, market research company GfK said yesterday.

The worst U.S. housing slump since the Great Depression has pushed up the cost of credit globally and caused stock markets to tumble. The world's biggest financial companies have posted more than $680 billion in writedowns and credit losses since the start of last year after the subprime mortgage market collapsed.

German Chancellor Angela Merkel's government has slashed its growth forecast for Europe's biggest economy next year to just 0.2 percent. Last year, the economy expanded 2.5 percent.

To contact the reporters on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net; Brian Swint in London at bswint@bloomberg.net