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German Inflation Falls

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German Inflation Falls

It is tomorrow’s Eurozone inflation and unemployment data that likely contain the compulsion for action by the European Central Bank (ECB) when it holds it’s monthly monetary policy meeting later this week. By way of an insight however are the preliminary German inflation numbers just published.

The headline Consumer Price Index (CPI) year on year is estimated to come in at 0.9% for the month of May. This represents a fall on the April number of 1.3% and also misses the 1.1% anticipated by the market. Month on month the number is -0.1%, below the market consensus of 0.2% but ahead of April’s -0.2% reading.

The ECB’s preferred metric of the Harmonized Index of Consumer Prices (HICP) has produced a preliminary year on year number of 0.6% for Germany for the month May, this is below the April reading of 1.1% and also below the 1.0% anticipated by the market. Month on month this level has come in at -0.3%, matching the prior month’s -0.3% and below the 0.1% expected by market analysts.

If economist polls are anything to go by then the ECB Governing Council is near certain to take monetary stimulus steps at this week’s meeting. The nature of these steps are really all that are in question. Despite the uncertainty around how the ECB will act the range of available options it is likely to pursue is limited. A recent Bloomberg poll has concluded that 88% of economists polled expect that the overnight deposit rate will be taken into negative territory by the ECB. The same poll was just short of unanimous in concluding that the benchmark Refinance Rate would also be reduced following Thursday’s ECB meeting.

Although there is little suggestion that quantitative easing will make it onto the agenda at this month’s policy meeting, there is talk of the ECB introducing a new long term refinance package in an effort to free up some bank liquidity.

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