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Bundesbank backs ECB

December 15, 2014

Germany has echoed the European Central Bank's line on adopting further stimulus measures to boost the eurozone. Traditionally 'hawkish' in its monetary policy, the Bundesbank has just released a surprising report.

Bundesbank Jens Weidmann
Image: Reuters

In its monthly report released Monday, the Bundesbank stuck closely to language used by ECB President Mario Draghi at his Dec. 4 news conference.

But the German central bank did not go so far as to openly support ECB plans to print more money in order to buy sovereign bonds - a practice known as quantitative easing (QE).

"The risks for the economic outlook in the euro area are on the downside," the Bundesbank said.

This would mean that at the beginning of the year, the "scope, pace and composition" of the ECB's monetary measures would need to be "changed."

ECB policymakers are debating whether to take fresh action to combat the threat of deflation in the eurozone, where inflation is running at 0.3 percent - far below the ECB's target of just under 2 percent. Economists are increasingly worried that plunging oil prices may send the eurozone into a deflationary spiral, which could depress consumption, growth and employment.

Deflation - When Everything Gets Cheaper!

Policy U-turn

The language used in the Bundesbank's report surprised analysts because the German central bank's chief, Jens Weidmann, has been reluctant to endorse quantitative easing so far. Instead, Weidmann has pressed for more reforms in eurozone countries as the main tool for boosting growth.

Just 10 days after releasing updated inflation and growth forecasts, the Bundesbank said Brent crude prices had since fallen 11 percent on average below forecast assumptions.

"Such a reduction in the price of crude oil points towards a downward revision of the inflation forecast and an upward revision of the forecast for GDP growth," the German central bank said.

"If the low crude oil prices continue, the projection for the HICP [inflation] rate for the coming year would have to be adjusted downwards by 0.4 percentage points," it added.

Falling oil prices would also lead to higher growth due to more spending by consumers and businesses.

uhe/el (AFP, Reuters, dpa)