German consumer morale rose to its highest level in more than seven years heading into July, as shoppers became more upbeat about the prospects for Europe’s largest economy and more willing to spend their cash with interest rates low.

The market research group GfK said today its forward-looking consumer sentiment indicator, based on a survey of around 2,000 people, climbed to 8.9 going into July after an upwardly revised reading of 8.6 in June.

That was its strongest reading since December 2006 and confounded the consensus forecast in a poll for 8.5, beating even the highest estimate for 8.8. That was in large part due to the European Central Bank decision earlier this month to cut interest rates to record lows - and the deposit rate to below zero.

“The ECB’s renewed cut of its key interest rate to 0.15 per cent and its introduction of a penalty rate on bank deposits placed with the central bank have provided an important boost to the consumer climate in Germany,” GfK analyst Rolf Buerkl said.

Germans, who have historically been savers, became more inclined to spend. Low interest rates gave them little incentive to leave their money in bank accounts.

They also benefited from a strong labour market and moderate inflation. Consumer expectations for the German economy, which grew at its fastest rate in three years in the first quarter, increased to a three-year high as they focussed on domestic conditions such as employment, willingness to invest and inflation. “There are clear positive signs in these areas, and gross domestic product is expected to grow by around 2 percent this year,” Mr Buerkl said.

But he added that crises in Iraq, Syria and Ukraine posed unpredictable risks and said they were likely to sour the mood in Germany if they escalated. Other recent surveys have already shown business morale dropping because of the crises abroad and investor morale weakening.

Income expectations dipped but nonetheless remained relatively close to their highest level since Germany re-unified more than two decades ago. Workers are benefiting from rising wages at a time of moderate inflation, and retirees are due to get bigger statutory pensions from July, GfK said.

Reuters