Bundesbank sees economy re-accelerating in second half

Germany's economy was likely to slow down sharply in the second quarter, but to recover thereafter, the county's central bank said in its monthly report.

In the same report, the Bundesbank also provided estimates on the effectiveness of the European Central Bank's programme of quantitative easing and called on the ECB to normalise its policy once prices were back on a path towards its stability mandate.

Lower orders for industrial exports and varying output in construction were set to weigh on German output, together with a lessening impact from the relatively warm winter, the central bank said.

"The positive sentiment indicated by corporate and household surveys suggest that economic growth after a weak second quarter should increase again over the next six months," the Bundesbank added.

The German monetary authority stuck by a forecast for the economy to grow by 1.7% in 2016, in-line with the previous year's figure.

Effectiveness of ECB QE on inflation

The Bundesbank said its models pointed to positive effects from QE on growth and inflation, although the estimates were uncertain, Market News International reported.

The European Central Bank's first set of quantitative easing measures would add between 0.1 and 2.5 percentage points to the euro area's rate of consumer price inflation between 2015 and 2017, the results of simulations run via two models showed.

Policy easing in December 2015 was set to provide an additional boost of between 0.1 and 1.0 percentage points, with the latest monetary policy package unveiled in March expected to add "a little less" than that, the Bundesbank said.

Those estimates were more or less-line with the ECB's own estimates that easing undertaken before March would add "at least" half a percentage point to inflation in 2016 and another half a point in 2017.

In its report, the Bundesbank also warned that the potential side-effects from QE were likely to increase over time.

There was little evidence as of yet that bank profitability had been negatively impacted but such a scenario could not be ruled out in the future, it said.

Rate-setters in Frankfurt also pointed out that the ECB's purchases eliminated country's incentives for budget consolidation and created the risk of political resistance to higher rates in future.

"This is why monetary policy [...] is required to usher in the normalization of monetary policy when it reaches a price path that is compatible with the stability target of the Eurosystem, regardless of the situation of public finances and financial stability."