German investor sentiment falls to eight-year low

German investor sentiment has fallen to its lowest level in eight years, a survey showed yesterday. However, the European Central Bank's (ECB) plans for interest rate rises are unlikely to be blown off course.

The Mannheim-based ZEW economic institute's latest indicator for economic expectations fell to -22.2 in September, down from -5.6 in August, suggesting an increased level of pessimism on the future state of the euro zone's largest economy.

The euro fell against the dollar in reaction to the news, the eighth consecutive month of falling sentiment, while Germany's leading DAX index of share prices also fell.

However, its impact on policymakers is likely to be limited. Based on a survey of about 300 financial analysts and institutional investors, the indicator largely reflects expectations that after a strong first half of 2006, a three percentage point rise in German VAT next January will slow growth next year.

ZEW's business sentiment indicator - which measures current business conditions - also fell, but remained in positive territory.

Analysts said that business expectations were becoming more negative despite positive current business sentiment because of fears about an economic slowdown in the US, as well as anticipated increases in taxation in Germany early next year.

"The drop of world demand as a result of the expected slowdown of the US economy is likely to negatively affect German exports," ZEW said in its statement.

Last month, an unexpectedly sharp decline in the ZEW was at odds with the separate business climate survey, released later by the Munich-based Ifo institute, which dipped only slightly and suggested that German growth remained robust.

The ECB has kept up its anti-inflation rhetoric in recent days and is expected to raise its main interest rate by a further quarter percentage point to 3.25 per cent on October 5th.

The Frankfurt-based central bank sees growth in the 12-country euro zone remaining firm and is forecasting that annual inflation will remain above its target of a rate "below but close" to 2 per cent this year and next.

But the ECB faces possible communication difficulties next month if, as some economists expect, headline inflation falls below 2 per cent in September on the back of recent oil price falls.