Bundesbank sees some German growth in Q1, then picking up pace

FRANKFURT Mon Feb 18, 2013 6:00am EST

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FRANKFURT Feb 18 (Reuters) - The German economy should grow in the first quarter and pick up pace later this year but increased optimism on financial markets should not conceal the need for reforms elsewhere in the euro zone, the Bundesbank said on Monday.

In its February monthly report, the German national central bank noted that the "euro appreciated sharply" over the last month "particularly so against the yen".

The Group of 20 nations declared on Saturday there would be no currency war and Japan's expansive policies, which have driven down the yen, escaped direct criticism in a statement thrashed out in Moscow by G20 policymakers.

Turning to Germany's economic outlook, the Bundesbank said it expected an increase in economic output in the first quarter.

"There are signs that economic activity will gradually pick up pace in the remainder of the year, although the external environment should not be expected to kick-start a very strong surge in demand," it added in the report.

The Bundesbank took aim at a deal agreed earlier this month to ease the burden of Ireland's bank debts.

Under the deal, Ireland won European Central Bank approval to stretch out the cost of bailing out Anglo Irish Bank, slicing billions off the country's borrowing needs and cutting its budget deficit.

"This approach underlines the increasingly close and problematic ties between monetary and fiscal policy in the European monetary union," the Bundesbank said in the report.

"Responsibility for providing any assistance to individual member states in servicing their sovereign debts should lie with the European Stability Mechanism (ESM), which was established for this purpose."

Turning to monetary policy, the Bundesbank said the ECB Governing Council "continues to believe that inflation will fall below the 2 percent mark in the next few months and will stay at a level compatible with price stability over the policy-relevant horizon."

The ECB's yet-to-be-used bond-purchase plan - dubbed the Outright Monetary Transactions (OMT) programme - had helped boost financial market prices, the Bundesbank said.

"However, the current relaxation in the financial markets should not conceal the fact that substantial structural adjustments are still needed in many countries," it added.

Earlier, Bundesbank board member Andreas Dombret said the ECB must ensure that its crisis-fighting measures do not distort financial markets and give rise to new crises.

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