October 30, 2017 / 1:23 PM / a year ago

Soft German inflation backs up ECB slow tapering

BERLIN (Reuters) - German annual inflation slowed in October and remained below the European Central Bank’s target, data showed on Monday, lending support to the bank’s decision to withdraw monetary stimulus only slowly.

FILE PHOTO: People walk on a shopping street in the southern German town of Konstanz January 17, 2015. REUTERS/Arnd Wiegmann

Consumer prices, harmonized to compare with other European countries (HICP), increased by 1.5 percent on the year after a rise of 1.8 percent in September, the Federal Statistics Office said. On the month, prices fell by 0.1 percent.

Both figures undershot expectations. A Reuters poll had pointed to an increase of 1.7 percent on the year and a rise of 0.1 percent on the month.

The ECB last week said it would cut its bond purchases in half from January, but extended the program until the end of September, promised years of stimulus and left the door open to backtracking, citing muted price pressures.

“Considering the strong expansion (in the euro zone) an ultra-expansive monetary policy is no longer justifiable,” VP Bank chief economist Thomas Gitzel wrote in a note.

“But looking at the inflation rate on the other hand, a significantly tighter monetary policy cannot be considered.”

A breakdown of non-harmonized German data showed that only food inflation had picked up from September. The prices of energy, services and rents grew by less in October than in the previous month.

Spanish inflation data, also published on Monday, showed that annual consumer price inflation inched down to 1.7 percent on the year in October, below September’s reading of 1.8 percent


The ECB’s careful approach is opposed by Bundesbank chief Jens Weidmann who before the ECB policy meeting last week demanded a quick and consistent withdrawal of monetary support.

ECB chief Mario Draghi said on Thursday the central bank’s decisions were not unanimous and that there was a large majority on some but not all policy measures approved by the ECB governing council, of which Weidmann is a member.

Economists said that inflationary pressures in Europe’s largest economy should continue to be subdued, partly because the stronger euro translates into little upward pressure on wages.

The German economy grew by 0.7 percent on the quarter between January and March and by 0.6 percent in the second quarter, driven by household and state spending as consumers and authorities reap the benefits of record-low borrowing costs and a low unemployment rate.

“As long as the showcase model of the euro zone economy – the German economy – which is also the most advanced in the current cycle, doesn’t show any signs of accelerating inflationary pressure, the ECB will feel extremely comfortable with its dovish tapering,” said Carsten Brzeski of ING Diba.

Reporting by Joseph Nasr; Editing by Paul Carrel and Andrew Heavens

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