Euro zone inflation risks have risen and weaker economic growth will not automatically offset them, the Bundesbank said in a report released today.
Inflation expectations in the euro zone have also remained above levels consistent with mid-term price stability, the German central bank added in its August monthly bulletin.
"Risks to medium-term price stability in the euro area have, in conjuction with continued strong external price pressures, increased further," the Bundesbank said in the report.
The fact that weaker growth rates are expected for the economy in the near future does not mean that enough of a countervailing effect for stability policy is taking shape and automatically offsetting the pressure on prices," it added.
The European Central Bank left interest rates unchanged at 4.25 per cent earlier this month and insisted inflation was still its key fear even though risks to growth were taking hold.
The Bundesbank said inflation in Germany could ease slightly, with prices for fuel, heating oil and agricultural products likely to fall. But inflation would probably remain significantly above 2 per cent, it added. German annual inflation registered 3.3 per cent in July.
A sharp rise in energy costs had dented real incomes and reduced consumers' willingness to spend, weakening demand both in Germany and in key export markets, the bank said.
The German economy had not lost the resilience to economic cycles that it had gained in recent years, the bank added.
"Nevertheless, during the first half of 2008 fresh burdens have added to lingering uncertainty and persisting global challenges, such that the accumulated 'risk mix' is now no longer free of tangible effects for the domestic economy and points to a slower pace for the remainder of the year," it said.
Reuters