Merkel backs ECB plan for rate hike as the Germans opt to save not spend
GERMAN Chancellor Angela Merkel appeared to give some support to tomorrow's expected rise in ECB interest rates, saying she was very concerned about inflation in Germany.
The case for a rate rise also increased after figures showing unemployment in Germany fell to a near 16-year low in June and retail sales rose strongly in May.
The jobless fall took the unemployment rate down to 7.8pc, which Bundesbank data showed was the lowest since August 1992.
Ms Merkel told German farmers: "On the one hand we have economic growth and a much improved employment situation.
"On the other, we have accelerating inflation due to rising energy and food prices, which causes us great concern and which of course eats up a large part of the upswing for many people."
German inflation accelerated in June to 3.3pc -- its highest level in nearly 15 years. Ms Merkel's comments contrasted with those of French President Nicolasa Sarkozy, who said that doubling, or even trebling, interest rates would not bring down oil prices.
German Finance Minister Peer Steinbrueck echoed Mr Sarkozy's views, saying the ECB should consider the impact of its interest rate decisions on economic growth, but said he shared Ms Merkel's concern about inflation.
Mr Steinbrueck said: "I have the impression that the inflation issue will occupy us for much longer than the crisis on financial markets. Inflation is a problem, but there are no short-term solutions."
German retail sales rose by a strong 2.6pc in May, but are still down on the average for the first three months of the year. Although wages are rising by close to 4pc, German consumers remain cautious and are inclined to curb spending when inflation is high.
Diana Choyleva at Lombard Street Research in London said: "At the best of times Germans are risk-averse people who are not used to the 'borrow-and-spend' attitude of their Anglo-Saxon counterparts.
"Spooked by inflation, on top of their perennial worry about inadequate pensions, German consumers continue to save excessively out of their incomes and are unlikely to provide much support to economic growth."