Economics - The week in view: Steady prices calm Germany's jitters

Inflation figures in Germany this week are expected to confirm Bundesbank president Hans Tietmeyer's recent confidence that price rises are subdued and are unlikely to accelerate, suggesting that interest rates will remain unchanged.

Mr Tietmeyer said last Thursday that price pressures coming from "outside the economy" would continue to be kept in check by fragile consumer demand in Germany.

Neither higher import prices caused by a 10 per cent decline in the mark this year nor excessive money supply growth is threatening to push Germany's annual inflation rate above the Bundesbank's long-term target of 2 per cent this year.

March M3 money supply growth, the Bundesbank's key tool for determining its monetary policy, probably slowed from the month before, while western Germany's annual inflation rate in April probably held steady.

"The economy will continue to be characterised by low inflation," said Gernot Nerb, an economist at Salomon Brothers. "Bundesbank policy is on hold for the rest of the year."

March M3, due out early next week, probably rose 8.2 per cent from the fourth quarter of 1996, below February's 9.1 per cent growth, analysts estimate.

Consumer price reports from four western German states, due out from Wednesday, are expected to show inflation was steady in April at 1.6 per cent.

"Prices at the manufacturing level may increase, but falling prices of rents and services are going to dampen consumer inflation," said Ralph Sueppel, an economist at JP Morgan. "We could see an inflation rate as low as 1 per cent by the end of the year."

While Bundesbank officials appear content about inflation, Mr Tietmeyer warned he is "not interested" in a further weakening of the mark, an indication that the dollar may be climbing too quickly for the Bundesbank's liking. His comments helped knock the US currency off its 37-month high of Dm1.7366, set early last week.

Near-record unemployment of 11.7 per cent and higher payroll contributions have deterred consumer spending in recent months, making companies reluctant to invest. This is limiting Germany's economic upswing. But the government remains optimistic about a recovery - It is expecting 2.5 per cent growth this year, up from 1.4 per cent last year.

On Tuesday Germany's six leading economic research institutes, including IFO and DIW, will announce their spring forecast for the economy. It's likely to be more pessimistic than the German government. The estimate for the deficit will be the most closely watched for investors to judge how close Germany is to meeting the criteria for EMU entry.

Import prices have been bolstered in recent months by the weaker mark. The rise probably slowed in March as the dollar fell 1.4 per cent against the mark last month, having surged 9.6 per cent against the German currency in the first two months of the year. Oil prices, which have fallen more than 25 per cent since the start of the year, are also helping to keep inflation under control. Figures for import prices are due out on Friday or the following Monday. Copyright: IOS & Bloomberg