GERMANY’S COST of borrowing dropped to a new record low yesterday as investors continued to seek “safe haven” bonds in the euro zone crisis. The drop was mirrored by a fall in Germany’s inflation rate, down in June to its lowest level in 18 months.
Germany’s Finanzagentur, or financial agency, sold €4.15 billion worth of 10-year government bonds yesterday at an average interest rate of just 1.31 per cent, down from 1.52 per cent interest last month.
German bond yields dropped accordingly, with the rate for two-year bonds falling to -0.013 per cent yesterday, up slightly from a rate of -0.018 per cent last week.
Citigroup analyst Peter Goves attributed the lows to a “lack of fundamental progress in arresting the euro area crisis”.
The German lows contrasted with new highs for Spanish sovereign debt. Madrid’s 10-year bonds rose, pushing down the yield by 16 basis points, or 0.16 percentage points, to 6.65 per cent.
That rise came amid announcements by Spain of measures to reduce its deficit by cutting spending and raising taxes.
German consumer prices fell by 0.1 per cent last month, and rose by 1.7 per cent viewed annually, according to official figures from the government statistics agency Destatis.
Using a harmonised EU method of calculation, German inflation dropped to 2 per cent from 2.2 per cent in May.
Following on from a May drop in the consumer price index, this gives Germany the lowest inflation rate since December 2010, putting Europe’s largest economy well within the European Central Bank target of inflation at or below 2 per cent in the medium term.
ECB president Mario Draghi said last week he expected euro zone inflation to slow further this year and drop below 2 per cent in 2013.
“The crisis and the drop in oil prices mean that any inflation threats have been banished in Germany,” said UniCredit economist Alexander Koch to Bloomberg.
“At the same time the strong labour market and rising wages mean that the inflation rate is unlikely to drop as much as in other euro area countries.”
Destatis said the defining factor in June’s consumer prices were energy and food prices, respectively up 4 per cent and 3.6 per cent annually. Without these considerations the annual inflation rate would have stood even lower – at 1.1 per cent – in June.
