Tame German prices set to cool euro zone inflation

By Dave Graham

BERLIN (Reuters) - German inflation likely slowed by more than expected in April, suggesting price pressures in the euro zone have retreated, and with them the risk of a rise in interest rates by the European Central Bank.

Inflation eased by a full percentage point in Germany's most populous state North Rhine-Westphalia, and slowed significantly in five others this month, official data showed on Monday.

Offering the first insight into price trends in the euro area, the states' figures showed prices falling by between 0.2 and 0.3 percent on the month, bucking expectations for a 0.2 percent increase across Germany as a whole in April.

The euro <EUR=> fell against the dollar following the first figures, dipping by around half a cent, Reuters data showed.

Bernd Weidensteiner, an economist at DZ Bank, said that after a decline in business sentiment in April, the tame price figures should dispel any lingering concerns the ECB might raise borrowing costs to dampen inflationary pressure.

"I don't think there was ever really much danger of a rate increase, but we're still a long way from seeing a rate cut," he said. "That's not something the ECB is going to discuss before the end of this year at the earliest."

"With food prices still rising and oil at a record, I think May figures could be worse. We might see euro zone inflation at 3.3 percent in April, but I don't see it any weaker."

Euro zone inflation hit a record 3.6 percent in March, prompting ECB Executive Board Member Lorenzo Bini Smaghi to describe it as "intolerable." Other ECB officials have raised the possibility of tighter monetary policy in recent weeks.