Bundesbank Warns German Inflation Could Be Around 5% in 2022

(Bloomberg) -- German inflation may average 5% this year as Russia's war with Ukraine will further boost energy prices, according to the Bundesbank.

“The euro area is also expected to record a high rate of inflation,” President Joachim Nagel said in a statement on Wednesday. “We need to keep our sights trained on the normalization of our monetary policy.”

Nagel, who sits on the European Central Bank's Governing Council and has previously said that an interest-rate increase may be possible by year-end, explained that “it is not yet possible at the present time to reliably estimate what effects the war will have on economic developments in Germany.”

The Bundesbank's report added that -- despite currently high inflation rates -- there are not yet signs that longer-term expectations are becoming de-anchored.

Only three weeks ago, Nagel predicted annual average price growth of more than 4% this year, underscoring the difficulty of making reliable predictions amid rapidly changing economic developments and geopolitical risks. Up until last week, the ECB was seen as likely to bring forward the end of its net bond buying, a prospect which is becoming less likely amid uncertainty unleashed by the war.

The ECB next meets to set policy on March 9-10.

On Wednesday, the Bundesbank also published its annual report, in which it stated that it will not transfer any profit to the government, similar to the previous year.

Instead, Nagel said it was necessary to further increase provisions to guard against risks on the Bundesbank's balance sheet, after the pandemic crisis prompted to ECB to launch a 1.85 trillion euro ($2.1 trillion) emergency bond-buying program.

“In the years 2020 and 2021, the risks on our balance sheet increased substantially overall compared with the pre-pandemic period,” Nagel said. The Bundesbank didn't distribute a profit to the government last year for the first time since 1979.