Eyes on ECB as German inflation rate fades to single-digits

(Alliance News) - A cooler-than-expected inflation reading from Germany will not halt the European Central Bank's tightening plans, analysts at Oxford Economics predicted on Tuesday.

The inflation rate in Germany, as measured by the year-on-year change in the consumer price index, is expected to be 8.6% in December, compared to 10.0% in November, Destatis reported.

On a monthly basis, consumer prices are expected to be down 0.8% in December from November. In November, month-on-month consumer prices were down 0.5%.

"The sharp fall in German headline inflation in December is good news for wary consumers but offers mixed news to the ECB. State-level data suggests that inflation slowed to 8.6% from 10% in November. But that was primarily due to the first stage of the government's gas price brake lowering gas bills for some consumers, while core inflation likely edged up a tad,"

"This – alongside the news that the German labour market remained robust at the end of 2022 – will likely bolster the ECB's view that the recession is set to be shallow and that underlying price pressures remain too strong to stop tightening for now."

Oxford Economics expects the ECB to hike by another 50 basis points when it meets on February 2.

Last month, it lifted rates by 50 basis points, as expected. That hike took the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility to 2.50%, 2.75% and 2.00%, respectively.

Dutch bank ING expect the ECB to hike rates by a total of 100 basis points in the upcoming meeting and the next.

"Only at the second meeting in March will we see updated macro forecasts. If energy prices have remained at their current levels by then, the ECB will have to revise down its own inflation forecasts, and calls for at least a pause in the current hiking cycle will grow louder," ING added.

By Eric Cunha, Alliance News news editor

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