FRANKFURT/BERLIN German economic growth should steady after a strong second quarter, the Bundesbank said on Monday, adding that the European Central Bank's forward guidance on low interest rates was "not an unconditional commitment".
The performance of Germany - the euro zone's biggest economy - is crucial to the bloc's fortunes, and stronger-than-expected German and French growth helped pull the currency area out of recession in the second quarter.
In its August monthly report, the Bundesbank said the expansion in the second quarter - when Germany grew at the fastest pace in over a year - was likely to have returned the economy to "a normal level of capacity utilization".
"In the second half of 2013, economic growth in Germany is likely to return to normal and steady rates," it added. "The expected increase, more or less equaling that of potential growth, will ensure that capacity utilization remains good."
In June, the Bundesbank said German potential production growth was around 1.3 percent.
The 0.7-percent expansion on the quarter in the April-June period was partly due to weather-related catch-up effects after an unusually long and cold winter. Reuters data shows median German quarterly growth since 2000 has been around 0.34 percent.
"We saw a better dynamic in the second quarter and we expect that to continue in the third and fourth quarters," Economy Minister Philipp Roesler told Reuters in an interview ahead of next month's federal election in Germany.
He said small- and mid-sized firms would gain confidence from the stabilization of the euro zone, adding: "This leads to more investment by these companies in Germany, a rise in domestic demand and better growth numbers."
Germany's traditionally export-driven economy is relying on domestic demand to prop up growth as foreign trade looks likely to act as a drag this year, given that much of the euro zone, to which it sends 40 percent of its exports, is still struggling.
The euro zone's poorer south is struggling to climb out of a debt crisis with fiscal austerity and structural reforms that have yet to reduce painfully high unemployment rates.
NO UNCONDITIONAL COMMITMENT
To help breathe life into the bloc, the ECB committed in July to keep its interest rates at record lows for an "extended period", though Bundesbank chief Jens Weidmann was quick to add that the ECB had not "tied itself to the mast" with the move.
In Monday's report, the German national central bank reiterated that view.
"This is not an unconditional commitment and does not mark a change in the ECB's monetary policy strategy," it said of the ECB's so-called 'forward guidance' on low interest rates.
"The actual key ECB interest rates will continue to depend on the medium-term outlook for inflation, which is based on expectations regarding future developments in the real economy and on credit and monetary aggregates," the Bundesbank added.
The improved economic outlook, together with the muddying of ECB guidance by Weidmann and other policymakers, has led to a rise in short-term money market rates as investors see less reason for the euro zone central bank to cut interest rates.
The ECB's main rate is at a record low of 0.50 percent. In August, the bank reiterated its forward guidance that rates would stay low or lower for an extended period.
The central bank expects a gradual recovery in the euro zone later this year and next - a scenario supported by the second-quarter growth.
However, the Bundesbank said the euro zone crisis must be tackled more convincingly for investment to increase.
"Domestic investment is unlikely to pick up discernibly until there is a long-term improvement in the economic prospects for Germany's neighbors and the uncertainty surrounding economic policy is further checked through suitable measures to combat the debt crisis in the euro area," it said.
(Reporting by Eva Taylor in Frankfurt and Noah Barkin in Berlin; Writing by Paul Carrel Editing by Jeremy Gaunt)