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ECONOMY

Bundesbank’s Weber says ECB to hold course into 2011

Bundesbank chief Axel Weber indicated Friday the European Central Bank would pursue relaxed monetary policies into 2011 while suggesting he might not be a "diplomatic" ECB head.

Bundesbank's Weber says ECB to hold course into 2011
Photo: DPA

Weber, a leading candidate to take over as ECB head next year, told Bloomberg television Europe’s monetary authorities should help commercial banks make it through the end of the year before deciding when to withdraw exceptional measures taken to support them through the crisis.

“Most of these discussions about the continuation of the exit I think will be focused on the first quarter” of 2011, Weber said.

That suggested the ECB would continue for now to provide commercial banks with a full allotment of their bids for central bank loans.

But Weber added: “It’s clear that we need to re-embark on a normalisation procedure” to gradually get the eurozone banking system back to where it was before the global financial storm broke in August 2007.

His comments went further than others by ECB president Jean-Claude Trichet in suggesting the central bank would support banks for longer than some analysts have assumed.

But they also showed the ECB felt the 16-nation eurozone was getting to grips with its economic and financial crisis, whereas the US Federal Reserve recently voiced caution about an uncertain US economic recovery.

Germany is leading a eurozone rebound after posting record growth of 2.2 percent in the second quarter but Weber stressed that “we are in year four of the crisis and the markets are still fragile.”

Meanwhile, the 53-year-old German central bank governor was asked if he was diplomatic enough to head the ECB after Trichet steps down in October 2011.

“It’s important to be a diplomat for the diplomatic corps, it’s not so important for a central bank,” Weber said.

He is considered a policy “hawk” due to a consistent focus on battling inflation but some observers say Weber might lack the sense of consensus attributed to another candidate, Italian central bank governor Mario Draghi.

“I think it’s very important for central banks to be clearly focused and also, if necessary, to deliver undiplomatic messages to governments,” Weber said.

Barclays Capital analyst Julian Callow said that “Weber’s views concerning the full (loan) allotments might also be influenced by his desire to position himself as the successor to Mr. Trichet as ECB president.”

Weber declined to discuss the issue directly, saying: “We should focus all our energy and attention on solving the economic problems that we face.”

But Callow felt Weber’s remarks were noteworthy since “he is pre-empting the discussion that was meant to be scheduled for the next (ECB) policy meeting,” and “might perhaps be an irritation” to Trichet.

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ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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