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Bundesbank quells fears over deflation

24/06/2003 15:02
THE Bundesbank attempted to quell fears of an outbreak of Japanese-style deflation in Europe's biggest economy while admitting that it was on guard against the problem.

In its June monthly report, the German central bank says that although a deflationary risk does exist, there is no sign yet of it turning into a damaging reality.

"On the whole, there are no signs that Germany is sliding into deflation with a sustained decline in prices and self-perpetuating downward economic spiral," the Bundesbank report says. It adds that the European Central Bank's half-point cut in interest rates on June 5 "created monetary conditions sufficient to allow an economic upturn".

The report says that although Germany's stagnating economy increases its vulnerability, none of the signs of deflation has been detected. Pay is still rising and German consumers' reluctance to spend is for fear of redundancy and not because they expect price cuts.

Fear of deflation was also eased by figures showing acceleration in prices in June in Bavaria, the first of six German states to report inflation figures.