By Sruthi Shankar and Bansari Mayur Kamdar
(Reuters) -German shares rallied on Wednesday after better-than-expected inflation data in the euro zone's largest economy boosted hopes that the European Central Bank will cut interest rates next year, while Italian stocks neared their highest since 2008.
The German DAX rose 1.1% to touch a four-month high after data showed German inflation eased more than expected in November.
European bond yields fell, with the benchmark 10-year German bond yield falling to a more than three-month low of 2.4%. [GVD/EUR]
"The ECB is going to come under increasing pressure going forward to cut rates. Growth in the euro zone is flat, if not already in recession and inflation is heading in the right direction," said Stuart Cole, chief macro economist at Equiti.
"I am in the camp that thinks the ECB will be forced to blink first and cut rates ahead of its peers. Compared to the US it does not have the underlying strength in its economy."
The continent-wide STOXX 600 index rose 0.4%, with rate-sensitive real estate and technology stocks rallying over 1.5% each.
Italy's blue chip index FTSE MIB gained 1.1% hitting its highest level since August and closing in on highs last seen in 2008, about two weeks after ratings agency Moody's (NYSE:MCO) lifted the country's debt outlook to stable.
Stellantis (NYSE:STLA) jumped 5.1% to the top of the Italian index after U.S. peer General Motors (NYSE:GM) outlined $10 billion in share buybacks.
While most regional markets gained, UK's FTSE 100 dipped 0.4% as weakness in financials weighed on the internationally focused index. (L)
Bank of England Governor Andrew Bailey said the central bank "will do what it takes" to get inflation down to its 2% target, adding that he had not yet seen enough progress towards that goal to be confident.
Among single stocks, Philips fell 3.7% after the U.S. Food and Drug Administration said it was alerting patients about a safety issue with the Dutch healthcare technology company's machines used for the treatment of obstructive sleep apnea.
Siltronic jumped 9.0% after Berenberg upgraded the German chip equipment supplier to "buy" from "hold".