Bundesbank cuts German inflation forecast after oil dip

By John O'Donnell

FRANKFURT (Reuters) - Germany's Bundesbank slashed its forecast for inflation on Monday, a signal that the same will happen across the wider euro zone, increasing pressure on the European Central Bank to loosen money supply.

The German central bank said that the tumbling price of oil meant that price inflation would hover close to zero this year, at 0.25 percent, compared to its earlier prediction of 1.1 percent.

The Bundesbank predicted that prices, watched closely by the ECB because its sole official task is to keep them ticking steadily upwards, would bounce back in Germany in 2017 but only to about 1.75 percent.

It had previously forecast a 2 percent rise in Germany, which accounts for more than a quarter of the euro zone's economy, a currency bloc spanning 19 countries that includes weaker nations such as Greece.

The dramatic adjustment in the euro zone's biggest economy means that the ECB is all but certain to reduce its own forecast in March, a step that would typically require it to respond by loosening money policy further.

Having already cut borrowing rates to rock bottom and launched a 1.5-trillion-euro money printing scheme to buy chiefly state bonds, the ECB's options are limited.

But ECB chief Mario Draghi will be eager not to disappoint markets. One indication of the bank's flexibility is its talks with the Italian government about buying bundles of bad loans and accepting them as collateral from banks in return for cash.

(Reporting by John O'Donnell; editing by Katharine Houreld)

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