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Bundesbank Cuts Prices Forecast as ECB Fights Low Inflation

Jens Weidmann, president of the Deutsche Bundesbank, warned today of risks from outside the country. Photographer: Andrew Harrer/Bloomberg
Jens Weidmann, president of the Deutsche Bundesbank, warned today of risks from outside the country. Photographer: Andrew Harrer/Bloomberg

The Bundesbank cut its inflation forecast for Germany this year, reflecting the euro area’s battle with subdued price pressures.

The Frankfurt-based central bank reduced its projection for 2014 to 1.1 percent from the 1.3 percent it predicted in December. It raised its economic growth forecast to 1.9 percent from 1.7 percent. Separate data on industrial output and trade signaled a continued expansion in Europe’s largest economy.

The reports come a day after the European Central Bank cut its inflation forecasts through 2016 and unveiled an historic package of stimulus measures. ECB President Mario Draghi introduced a negative rate for banks parking cash at the central bank and a liquidity injection aimed at boosting lending to companies as the region’s weakened banking system drags on the economic recovery.

“The German economy is on the right track, even if the growth dynamic is easing a bit,” said Mario Gruppe, an economist at NordLB in Hanover. “The economic impact of the interest-rate cut should remain moderate, and for the foreseeable future the environment for investment is still encouraging.”

The Bundesbank sees German consumer prices rising 1.5 percent next year and 1.9 percent in 2016. Gross domestic product is predicted to expand 2 percent in 2015 and 1.8 percent the following year.

Growth Outlook

Price gains in the euro area slowed to 0.5 percent in May, and inflation has been below 1 percent for the past eight months. That compares with the ECB’s target of just under 2 percent. The ECB yesterday cut its forecast for this year to 0.7 percent from 1 percent, and said the rate will only climb to 1.4 percent in 2016.

German industrial output increased 0.2 percent in April from the previous month, the Federal Statistics Office in Wiesbaden said today. While that’s less than economists forecast, it marks a return to growth after a decline in March. Exports rose 3 percent in April from the previous month, more than twice as much as estimates, and imports climbed 0.1 percent.

The country’s economic growth accelerated in the first three months of 2014 even as the expansion cooled in the 18-nation euro area as a whole. The German central bank has said domestic growth will slow “noticeably” this quarter and Bundesbank President Jens Weidmann warned today of risks from outside the country.

“Heightened geopolitical tensions or a renewed flare-up of the crises in the euro area would dampen GDP growth not only through the external trade channel, but also by affecting confidence,” he said in a statement.

The DAX Index of German stocks was little changed at 9,954 at 9:46 a.m. Frankfurt time today, after yesterday climbing above 10,000 for the first time.

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