German ‘wise ones’ see inflation uptick if banking woes blunt monetary policy

BERLIN (Reuters) – Germany’s economic council on Wednesday warned that inflation could remain high for longer than expected or even pick up again if monetary policy is blunted by financial market risks.

“The recent increase in financial market risks has made it more difficult for central banks to fight inflation,” the five “wise ones” who advise Berlin on economic policy said in their biannual report.

“If the monetary policy response is too weak due to these trade-offs, inflation could remain high for longer than expected or even pick up again,” they added.

The council revised its prediction that the German economy would face a mild recession this year, saying on Wednesday that gross domestic product (GDP) would grow by 0.2% in 2023 and 1.3% in 2024. This is in line with the government’s forecast.

Its members predict that inflation will come in at 6.6% in 2023 and 3.0% in 2024.

Inflation “will only gradually decline and remain elevated throughout the forecast horizon,” the report said, adding that the resulting loss of purchasing power, continued monetary tightening with rising interest rates and the continuing high level of economic uncertainty would dampen business investment.

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