February 28, 2020 / 1:58 PM / a month ago

UPDATE 1-German inflation edges towards ECB target in February

* Inflation rate accelerates to 1.7% from 1.6%

* Unemployment drops unexpectedly

* Investors ramp up expectations for ECB action

* They see rate cut as soon as June

* But two ECB policymakers see no need for immediate action (Adds jobless data, economist, background)

BERLIN, Feb 28 (Reuters) - German annual inflation accelerated in February to within touching distance of the European Central Bank’s target, data showed on Friday, but the coronavirus epidemic means the firming price pressures pose no threat to the ECB’s stimulus policy.

German consumer prices, harmonised to make them comparable with inflation data from other European Union countries, rose by 1.7% year-on-year after posting a 1.6% increase in the previous month, the Federal Statistics Office said.

Despite the acceleration, inflation remained just below the ECB’s target level of close to but below 2%.

The reading was above a Reuters forecast for 1.6%.

Labour Office data released earlier on Friday showed German unemployment dropped unexpectedly in February, suggesting that the strong job market will continue to support growth in Europe’s largest economy.

The number of people out of work fell by 10,000 to 2.262 million in seasonally adjusted terms. That confounded a Reuters consensus forecast for a rise of 3,000. The unemployment rate was steady at 5.0%.

“Today’s macro data is just a snapshot and probably the last pre-corona data for the German economy,” said ING economist Carsten Brzeski.

“The data paints a picture of an economy with strong domestic demand and some increase in underlying inflationary pressure. Just as the ECB would love it.”

But he added that the spread of the coronavirus to Europe and the accompanying market turmoil posed a potential shock to the economy that the ECB would have to address at its March policy meeting.

Rather than think about tightening policy, the ECB is under market pressure to loosen it further.

Investors ramped up expectations for a euro zone rate cut as soon as June on Friday, as fears that coronavirus could tip the world economy into recession gripped world markets.

“We expect the ECB to soften the December language, point out new downside risks to growth and to promise to monitor closely all developments and finally to stand ready to act,” Brzeski said.

Earlier on Friday, two ECB policymakers said the central bank does not need to take immediate action in response to the coronavirus epidemic, confounding market bets on a rate cut.

The central bank governors of Germany and Lithuania joined a number of fellow ECB rate setters in playing down the chances of a policy move in response to the epidemic, which is spreading to the euro zone having killed nearly 2,900 people in China.

Writing by Paul Carrel; editing by Michelle Martin and Philippa Fletcher

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