Bundesbank Slashes German Inflation Forecasts on Oil Slump

  • German central bank cuts 2016 inflation prediction to 0.25%
  • Still sees economy growing faster in 1Q on domestic spending

The Bundesbank slashed its forecast for German inflation due to recent declines in the price of oil, in an unscheduled adjustment to its economic outlook.

Consumer-price growth in Europe’s largest economy will now average approximately 0.25 percent in 2016, down from a December prediction of 1.1 percent, the Frankfurt-based central bank said in its monthly bulletin published on Monday. For 2017, the forecast was cut to 1.75 percent from 2 percent.

Projections are normally published twice a year, with the next outlook scheduled for June, yet the renewed slump in oil since the start of the year made the December calculations obsolete. While cheaper energy is weighing on the consumer price index, the Bundesbank also said it acts as a stimulant to the domestic economy and along with a strong jobs market may contribute to an acceleration in economic growth this quarter.

“Additional impetus may be expected notably from households’ substantial purchasing-power gains owing to the further fall in crude-oil prices at the turn of 2015-16,” the Bundesbank said. At the same time, slower inflation could “depress the core rate of inflation over a longer period and be linked to noticeably lower inflation expectations and therefore damped wage growth. However there are currently no signs of this in Germany.”

The European Central Bank may also have to adjust its euro-area economic outlook when it publishes fresh projections in March. Currently the ECB forecasts inflation of 1 percent in 2016 and 1.6 percent in 2017.

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