German investor confidence surged in March, a key survey showed Tuesday, on growing expectations that the European Central Bank will start cutting interest rates soon.

The ZEW institute's economic expectations index rose for the eighth consecutive time, climbing by 11.8 points month-on-month to reach 31.7 points.

The increase was larger than expected, with analysts surveyed by FactSet predicting a reading of 20 points.

"Economic expectations for Germany are significantly improving," said ZEW president Achim Wambach.

"More than 80 percent of those surveyed anticipate that the ECB will cut interest rates in the next six months," he added.

Hopes that borrowing costs will start coming down in the near future had contributed to a "more optimistic outlook for the German construction industry" in particular, he noted.

Germany's crucial export sector meanwhile was seen benefiting from "increased economic expectations for China as well as the expected depreciation of the dollar against the euro", he added.

German inflation slowed to 2.5 percent in February to reach the lowest level since June 2021.

The ECB has kept borrowing costs on hold since October, following an unprecedented streak of rate hikes to combat rising consumer prices.

With eurozone inflation steadily falling, many observers expect the first rate cut to come in June.

The ZEW survey also found that investors' assessment of Germany's current economic situation remained bleak, rising by just 1.2 points month-on-month to minus 80.5 points.

The German economy shrank by 0.3 percent last year, battered by high interest rates, elevated inflation and an industrial slowdown.

Europe's largest economy is forecast to return to modest growth this year as inflation eases and demand picks up.