Jan 31 (Reuters) - Euro zone government bond yields fell

and traders increased their bets on future rate cuts from the

European Central Bank after a raft of data pointed to a weak

economic outlook.

Borrowing costs inched higher early on Friday, after falling

the day before, as Thursday's European Central Bank policy

meeting confirmed investors' expectations for further monetary

easing.

Data from Germany suggested that the national inflation rate

could decline this month, although it had been expected to

remain unchanged, while French consumer prices increased

slightly less than anticipated to 1.8% year-on-year.

Germany's unemployment rate rose as the weakness of Europe's

biggest economy took its toll on the labour market.

"National and state level inflation data published so far

suggest that euro-zone inflation may come in a bit lower than

anticipated," said Andrew Kenningham, chief Europe economist at

Capital Economics.

"Services inflation in the largest (German) state, North

Rhine Westphalia, fell" despite a significant increase in public

transport inflation, he added.

Germany's 10-year bond yield, the euro area's

benchmark, fell 4 basis points (bps) to 2.48%.

"We expect overall inflation in France to remain close to

the current level on average over 2025 before returning to close

to 2% in 2026," said Charlotte de Montpellier, senior economist,

France and Switzerland at ING.

However, euro zone consumers and economists increased their

inflation expectations for this year, surveys showed on Friday.

Money markets priced in an ECB deposit facility rate at

1.95% at the end of 2025 -- which implies

three 25 bps cuts and a 20% chance of a fourth move by year-end

-- from around 2.05% before data. The depo rate is at 2.75%.

Germany's two-year bond yield, more sensitive to

ECB rate expectations, was down 8 bps at 2.115%, its lowest

level since Jan. 3.

Markets now await later in the session the U.S. Personal

Consumption Expenditures (PCE) Price Index, the Federal

Reserve's preferred measure of inflation.

The yield spread between OATs and Bunds -- a

market gauge of the risk premium investors demand to hold French

debt -- stood at 74.50 bps, after French Finance Minister Eric

Lombard said on Friday that talks on getting the 2025 budget

passed through parliament were "on the right track".

It widened to around 90 bps, its highest since 2012, in

mid-January and end-November amid fears that France would be

unable to cut its growing budget deficit.

Italy's 10-year yield was 3.5 bps lower at

3.57%. The gap between Italian and German yields

was at 108 bps, not far from its lowest level since October 2021

at 104.50 bps.