Saturday 24 June 2017

Rate rise fear over German inflation alert

European Central Bank (ECB) headquarters in Frankfurt. Photo: Reuters
European Central Bank (ECB) headquarters in Frankfurt. Photo: Reuters
Donal O'Donovan

Donal O'Donovan

German inflation could rise to 2pc in January due to higher energy prices, the Bundesbank said yesterday, hitting the European Central Bank's elusive target for the first time in four years.

It could have major implications for official interest rates, with repercussions for hundreds of thousands of Irish borrowers.

Germany's relatively quick inflation pick-up has already increased calls on the ECB to scale back its extensive stimulus measures as real savings rates turn negative and fears mount that the bank would now overshoot its target of close to, but below, 2pc.

Inflation above 2pc would be seen as a danger signal in Germany, and a trigger to tighten monetary policies - including ultimately by raising interest rates.

However, elsewhere in the eurozone, including in Ireland, Cyprus, Greece and Italy, price growth is either negative or just above zero - levels that would traditionally be seen to justify looser money supply.

In Ireland, Spain, Italy and elsewhere, the current official ECB interest rate - which is at an all-time low of 0pc - has helped keep borrowing costs low for tens of thousands of borrowers who might otherwise have been tipped into default after the crash.

This includes many homeowners who bought at the top of the market here but have benefited from cheap tracker mortgages.

As a result, pressure from Germany to tighten ECB policy could hurt the wider eurozone recovery.

The ECB has pushed back, arguing that it looks at inflation across the eurozone, not just one member, and it needs to see a broad-based, sustained rise in prices before lowering its guard.

"Due to a considerable increase in the daily average prices of oil products, the (inflation) rate could well reach 2pc in January," the Bundesbank said in its monthly report.

Inflation was 1.1pc across the 19-member eurozone in December and 1.7pc in Germany, the bloc's biggest economy and also home to the ECB.

The ECB has already agreed to scale back its monthly bond purchases by a quarter from April but also extended the program until the end of 2017.

An ECB survey last week also showed that underlying inflation, a key indicator watched by rate setters, will remain weak for the years to come, suggesting that the ECB is still far away from reducing its unprecedented stimulus measures.

Meanwhile, the Bank of England will leave its record-low interest rates and other stimulus measures unchanged at least until 2019, even though it is likely to revise up its 2017 growth predictions again next week, a Reuters poll found.

All but one of the 67 economists polled by Reuters in the last few days said the Bank would keep its policy unchanged when it announces the outcome of the latest meeting of its rate-setters on February 2.

After Britain voted last June to leave the European Union, the bank cut borrowing costs to a record low of 0.25pc and restarted its quantitative easing program as it responded to initial signs that the economy was slowing sharply.

But the economy has so far fared much better than feared, and two-thirds of the respondents in the Reuters poll said the bank would raise its growth forecasts again in its latest quarterly inflation report. The others said they would be left unaltered.

Irish Independent

Promoted articles

Also in Business