Sunday 20 January 2019

Inflation slows in Germany as ECB stimulus tapering looms

Chancellor Angela Merkel’s Germany is enjoying record-low unemployment and a rise in the export sector
Chancellor Angela Merkel’s Germany is enjoying record-low unemployment and a rise in the export sector

Piotr Skolimowski

German inflation slowed in December, underscoring the challenge the European Central Bank will face next year as it gradually removes its stimulus programme.

Consumer prices rose an annual 1.6pc, Germany's Federal Statistics Office said yesterday. While that's slower than November's 1.8pc, it's above the 1.4pc median forecast in a Bloomberg survey of economists.

Inflation has remained tepid in Germany even as record-low unemployment bolsters private consumption and a recovery in global trade fuels exports and investment.

The Bundesbank this month lifted its projections for growth in Europe's largest economy through 2019 and said it expects momentum to remain strong over the coming year. It sees inflation accelerating to 1.9pc in 2020.

The German number comes a week before data for the euro area, where consumer-price gains are expected to slow to an annual rate of 1.4pc.

The ECB has already warned that inflation will slow temporarily in the coming months before accelerating again later in 2018.

Earlier this month, ECB President Mario Draghi stopped short of declaring that the inflation goal will be met in 2020, although he expects underlying price pressures to rise gradually over the medium term as the euro-area economy enjoys its best growth in a decade. The ECB will next month halve its monthly pace of asset purchases to €30bn ($36bn) and continue buying until at least September.

While here at home, the ECB's asset purchase programme has played a crucial role in bolstering the confidence of international investors in Ireland's public debt sustainability, the expected tapering off isn't expected to be overly detrimental for the Irish sovereign, according to BMI Research's 'Ireland Country Risk Report' for 2018.

"Although we expect modest tapering from the ECB's current €60bn monthly pace of purchases to begin at some point in the first half of 2018, a sizeable percentage of public debt is at fixed rates and consequently the benefits of the ECB's asset purchasing programme have been locked in," the report's authors said.

Referring to Ireland's future financing needs, the BMI report says they "are projected to be sustainable, reflecting the [Irish] government's prudent fiscal stance and the relatively long maturity profile of public debt".

The benefit of the ECB's quantitative-easing policy on Ireland's economic position was manifested as recently as a fortnight ago as the National Treasury Management Agency (NTMA) tapped investors for €500m of treasury bills, short-term debt due to be repaid in a year.

Having already borrowed five-year bonds at a negative rate last July, the NTMA saw its latest offer hugely-oversubscribed, meaning most investors were turned away. This was despite the fact that the yield, which in practice is the interest rate charged, was -0.52pc, so less than zero.

The impact of the ECB programme's eventual discontinuance could however prove to be especially detrimental for Irish households and firms as the cost of financing to the State, and the cost of funds to banks increases.

In a recent report on the matter, the ESRI pointed out the cost of new loans could rise while existing debt could become harder to service. (Bloomberg)

Irish Independent

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