The Bundesbank has sided with the German government's campaign for low interest rates in the euro zone, by putting a consistently optimistic gloss on Germany's inflation outlook in material presented to the European Central Bank.
The Bundesbank's stand marks a shift in its traditional position as Europe's guardian of price stability.
ECB experts have treated the material as overly optimistic and have modified it before it has reached the ECB's governing council, which sets interest rates. Neither the ECB nor the Bundesbank publishes official inflation forecasts. It is therefore difficult to pin down the precise scope of differences between the two central banks.
But experts say the ECB's private assessment of the inflation outlook has in recent months been consistently more hawkish than that of the Bundesbank. This underscores the view of Mr Ernst Welteke, Bundesbank president, and the centre-left government in Berlin that Germany does not need higher interest rates because inflation is not a serious domestic problem.
Mr Welteke, a former Social Democratic Party (SPD) politician, who is close to Germany's SPD-led government, made clear before the ECB's interest rate rises in November and on February 3rd that he was a reluctant supporter of the increases and was relaxed about the euro's decline against the dollar.
Officials at the ECB said it was certain that the ECB's governing council had never been persuaded to delay a rate move because of the Bundesbank's efforts.
Mr Otmar Issing, the ECB's chief economist, said the ECB prepared an internal forecast for the euro zone separately from forecasts submitted by national central banks.
"We try to compile forecasts presented by national central banks. This is a kind of check, to find out if there is consistency," he said. He added that the most important point was that the ECB studied the inflation outlook for the entire 11-state euro zone, rather than for individual states. Mr Issing also hinted yesterday that the ECB might soon make another increase in interest rates, saying inflationary pressures were on the rise in the euro zone.
"For the euro area, this year and next will according to the judgment of all international institutions show a substantially higher increase in the inflation rate. This is not to cry alarm. We are not forecasting that inflation will get out of control," he said.
"In a forward-looking strategy it is important to act in a timely manner because, if you act too late, rate increases are much greater, distortions will have already developed, and expectations, which are so important in financial markets, will have developed in the wrong direction."
Economists said Mr Issing's remarks suggested that the ECB's 17-member governing council might be considering a rate increase as early as March 2nd, when it next meets. The council, which raised its benchmark refinancing rate on February 3rd to 3.25 per cent from 3 per cent, left rates unchanged yesterday after a regular meeting at its Frankfurt headquarters.
Mr Issing cited the euro's weakness on foreign exchange markets and higher raw materials prices as two factors stoking inflationary pressures in the euro zone. "The decline in the euro has contributed to upward risks for price stability, especially because the world economy has now really changed towards quite high growth. Raw materials prices are on a rising trend, and it's not just oil," he said.
"In this context the weakening of the currency translates into substantially higher import prices, oil prices most spectacularly, but this is just one part of it."
He noted that oil prices had almost tripled in dollar terms since January 1999, when the euro was launched, and said the impact was even greater in euro terms.
