The June 2018 edition of the Bundesbank’s Monthly Report outlines the prospects for the German economy on the basis of macroeconomic projections for 2018 and 2019, with a look ahead at the year 2020.  According to the forecast, which was published on 15 June, the German economy will grow by 2.0% in 2018 and 1.9% next year (both figures calendar adjusted). It is forecast to grow by 1.6% in 2020. "All in all, the projection paints a picture of an ongoing economic boom, in which increasing supply-side bottlenecks are reflected in strong wage growth and in higher domestic inflation," noted Bundesbank President Jens Weidmann in reference to the Bank’s latest economic projection.

Discussion on raising the target inflation rate

Another topic broached in the latest edition of the Monthly Report is the issue of whether central banks should raise the inflation target. At present, the majority of central banks in advanced economies aim for an inflation rate of around 2%. Some economists argue that a higher target inflation rate would widen the safety margin to the lower bound on interest rates, thus broadening the scope for monetary policy countermeasures in times of crisis.

The Bundesbank’s experts take a critical view of this proposal, as its proponents largely fail to take into account the wider implications of a higher inflation target. In particular, central banks that aim for a higher target inflation rate would, for example, have to be more aggressive in their interest rate policy responses, which the experts believe would mean relinquishing some of that room for manoeuvre.