Bundesbank says ECB remains worried over long-term inflation risks

FRANKFURT (Thomson Financial) - The European Central Bank continues to remain concerned over the long-term risks to inflation, the Bundesbank said in its monthly report.

"The concern with regards to long-term inflation risks, which had previously prompted the ECB Governing Council to withdraw in stages the degree of expansion, remains unchanged in their view," it said.

The "dynamic" growth in money supply and credit point to these risks, it noted.

"Stability risks are also linked with the robust economy as well as the increasing tensions in labour markets," it said.

It noted that euro zone HICP consumer prices rose year-on-year 2.9 pct in the fourth quarter and in January, it was 3.2 pct higher year-on-year.

Commenting on Germany, it said preliminary data showed the country's economy grew 0.3 pct in seasonal and calendar-adjusted terms in the fourth quarter compared with the 0.7 pct growth in the third quarter.

It noted that although a breakdown of fourth quarter details has not yet been officially released, available indicators showed growth in private consumption and construction investments were below the results achieved last summer.

It said compared with previous estimates, the economic outlook in Germany has dimmed, but only "insignificantly".

It still holds the view that domestic demand -- which was temporarily impaired last autumn by uncertainties and temporary price increases -- is expected to live up to its potential growth this year.

It said "strong" impulse from the demand side show that the "cyclical force of growth remains fundamentally intact and that the results in the current quarter underline this basic trends in the economy".

"This interpretation is also supported by the high (production) capacity utilization, the robust business climate and by the keen readiness of companies to increase personnel," it added.

But it noted too that there are downside risks which have appeared since middle of last year and these risks "have partly gained importance", such as the scenario of a cyclical weakness in the US economy.

It said it would not be "appropriate" for Germany to ease its fiscal policy to the scale which has prompted the US to come up with an economic program to thwart recession.

"The risks to economic development may well have also slightly increased domestically but all in all the domestic economy like before is in a solid state and within the corridor of its normal capacity utilization," it said.