Bundesbank’s latest monthly report indicates that while some factors are bolstering the economy, they are simultaneously complicating efforts to bring inflation down to target.
“The labor markets are still operating at high capacity, wage growth is brisk, and prices are rising strongly, particularly in the service sector,” the report stated.
Bundesbank highlighted that “inflationary risks also predominate on the supply side.” Services inflation is expected to decline only modestly in the coming months, with the overall price index likely to fluctuate around current levels.
Given these conditions, the Bundesbank advised that “possible further interest rate cuts should therefore be carefully considered in light of current data.”
Bundesbank anticipates the economy to “strengthen somewhat” in the Q3. Private consumption is expected to “pick up a little more speed” driven by strongly rising wages, falling inflation, and a robust labor market, which should continue to support consumer spending.
However, the report also cautioned that industrial activity is likely to improve “only hesitantly” due to weak demand, which could result in GDP growth for Q3 falling slightly short of the expectations from June forecast.
