German Price Growth Bodes Well for ECB

By Todd Buell Features Dow Jones Newswires

Prices rose more than expected in Germany this month, a sign of higher inflation in the eurozone that could pave the way for the European Central Bank to withdraw its aggressive policy measures.

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Germany's statistics office Destatis reported Friday that in European Union harmonized terms, inflation in Germany was 1.6% higher in December than one year earlier. This was higher than the 1.4% growth rate predicted in a Wall Street Journal poll of analysts last week. Destatis will release final data on Jan. 16.

Germany is Europe's largest economy, which means policy makers and analysts pay particular attention to economic trends in the country. The ECB has been struggling to push up inflation in the currency bloc closer to its medium-term target of just below 2%. In forecasts issued earlier this month, the ECB said that even by 2020 inflation would average only 1.7%. Eurozone inflation was 1.5% in November.

In addition to rock-bottom interest rates, the ECB has been purchasing government bonds in a large scale for nearly three years. Starting in January it will lower its monthly volume of purchases to EUR30 billion from EUR60 billion through September. Analysts are closely watching the ECB's communication early next year for clues on a potential further reduction.

The ECB faces a difficult communications challenge as it signals the need for supportive policy against the backdrop of strong economic data.

Earlier Friday, the ECB reported that bank lending to firms grew by 3.1% in November after 2.9% in the previous month, while lending to households increased by 2.8% after 2.7%. The central bank's key indicator of money supply growth, M3, grew by 4.9% in November, after 5.0% in the previous month, and coming in line with expectations of 4.9% in a Wall Street Journal survey. The three month average stood at 5.0%.

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The eurozone remains a strongly bank-dependent economy. Therefore policy makers, including those at the ECB, look closely at bank lending data to gauge the health of the economy. Money supply growth remains a key part of the central bank's analysis of the economy, though some experts say that the link between money supply and inflation isn't as clear as it once was.

Also Friday, an economic indicator compiled by the Bank of Italy pointed to the strongest economic expansion in the eurozone since 2006. The Eurocoin indicator rose to 0.91 in December from 0.84 in November, reaching its highest level since May 2006.

Write to Todd Buell at todd.buell@wsj.com

(END) Dow Jones Newswires

December 29, 2017 08:47 ET (13:47 GMT)