Bundesbank Warns of Inflation Risks Despite Slower Growth

Despite fears that Germany could be edging towards a sharp downturn, the Bundesbank's August bulletin did not see the nation's economy spiraling downwards in the coming months.

But it said the nation was facing "an economic lean period during the second half of the year."

The Bundesbank bulletin expressed concerns that inflationary expectations were becoming entrenched in Germany and among its partners in the 15-member eurozone and that slowing growth was unlikely to dampen price pressures.

"Despite general caution in estimating the growth outlook for the euro zone, inflation expectations of market participants, according to surveys and financial market data, have been higher of late than can be reconciled with price stability over the long run," the Bundesbank said.

Shrink in economy won't dampen fears: Bundesbank

Data released last week by Germany's statistics office showed the economy shrank for the first time in almost four years during the second quarter, contracting by 0.5 percent on the quarter.

But the Bundesbank said the second-quarter contraction was a reaction to the solid growth rate Germany clocked up during the first three months of the year when the economy grew by 1.3 percent.

The Bundesbank, which takes a hardline anti-inflation stance, does not expect slowing growth to undercut the inflationary pressures that have built up in the eurozone as a result of higher food and energy prices.

"The fact that the pace of growth is likely to slow does not mean that this will be enough to counteract stability concerns, nor will it automatically balance out inflationary pressures," the central bank said. Bundesbank chief Axel Weber is a member of the European Central Bank's 21-head rate-setting council.

Last month the Frankfurt-based ECB raised its benchmark refinancing rate by 25 percent basis points to 4.25 percent in a bid to ward off resurgent inflation.

"It's the duty of monetary policy to prevent increased price risks from translating into a long-lasting higher inflation rate," the bank said.

Continuous growth in German economy ends

The second-quarter drop in Germany's growth brought to an end a solid economic upswing in recent years, with the economy chalking up a growth rate last year of 2.5 percent.

Adjusted for working days, the German economy grew by 1.7 percent year-on-year in the three months to the end of June, based on last week's statistics office data.