Bundesbank slashes inflation forecasts

The German central bank has cut its inflation forecasts for this year and the next, largely on the back of the renewed downturn in crude oil prices, which it said had not been expected in June.

The Bundesbank said it now expects German inflation at 0.2% this year, 1.1% next year and 2% in 2017. This is sharply lower than its estimates in June, when it predicted growth of 0.5%, 1.8% and 2.2%, respectively.

The bank was upbeat in terms of its growth outlook for Germany, saying it expects real gross domestic product to grow 1.7% this year, followed by a 1.8% increase in 2016 and 1.7% in 2017.

Forecasts for this year and the next were unchanged from earlier projections, but the 2017 estimate was revised up from 1.5%.

"The German economy is currently following a growth path that is primarily underpinned by domestic demand," the Bundesbank said.

"The main drivers are the favourable labour market situation and substantial increases in households' real disposable income, though foreign trade is currently being hampered by frail demand from the emerging market economies.

“With export markets outside the euro area expected to rebound and economic growth within the euro area gaining a little more traction, the healthy underlying state of the German economy should stand out even more clearly over the next two years.”