Germany is showing no sign of sliding into deflation at the moment, but risks still loom and need to be observed closely, the Bundesbank said today.
In its monthly report for June, the Bundesbank said the European Central Bank (ECB) had already taken steps to protect the euro zone from the threat of deflation and its June 5th half-point interest rate cut had created the conditions to boost growth.
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"On the whole there are no signs that Germany is sliding into deflation with a sustained decline in prices and self-perpetuating downward economic spiral," the Bundesbank wrote.
"With its rate cut on June 5 the ECB created monetary conditions sufficient to allow an economic upturn," it said, adding that the revision of the ECB's inflation target for the euro zone had also helped protect against deflation.
The ECB in May clarified its definition of price stability in the euro zone saying it aims for inflation of "close to" 2 per cent in the medium term, which many economists said was effectively an easing of its target.
The Bundesbank said although Germany's stagnating economy increased its susceptibility to negative shocks, there was no indication Germany was experiencing a Japan-style, broad-based decline in prices.
It pointed out that wages were continuing to rise and said Germans were reluctant to consume because they feared redundancy rather than because they expected price cuts. It also said there was no credit crunch, although many banks were now more cautious about lending.