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Germany inflation rate: Latest central bank projections of price rises reaching 70-year highs

By Fitri Wulandari

Edited by Alexandra Pankratyeva

17:23, 25 August 2022

Germany flag and wooden cubes with text, concept on the theme of inflation in the country
Germany’s inflation rate is now at decades high. What’s next for Europe’s largest economy? Photo: iQoncept / Shutterstock

Germany, Europe’s largest economy in terms of gross domestic products (GDP), has been struggling to contain sky-high inflation exacerbated by record high gas prices

In May, the country’s harmonised index of consumer prices (HICP) peaked at 8.7%, while Consumer Price Index (CPI) inflation hit 7.9%. 

The Deutsche Bundesbank, Germany’s central bank, said in June that the last time the country experienced high inflation rates was in the 1970s during the oil crisis. 

Today, energy and food prices are forecast to remain high, with the protracted war in Ukraine and the country scrambling to find alternative gas sources to replace Russian supply. What will be the outlook for the German inflation rate?

In this article, we examine the role of the Bundesbank in Germany’s monetary policy, historical Germany’s inflation data,and the latest forecast on Germany’s inflation rate from analysts.

About the Deutsche Bundesbank

The Deutsche Bundesbank is the central bank of the Federal Republic of Germany. Together with other national central banks and the European Central Bank (ECB), the Bundesbank forms the Eurosystem and shares responsibility for the single currency euro. It has been a member of the Eurosystem since 1999.

Because it’s a member of the Eurosystem, the Bundesbank’s main task is to maintain price stability in the euro area, the primary objective of the Eurosystem monetary policy. As a voting member of the ECB’s Governing Council, the Bundesbank’s President is involved in the monetary policy decision-making process. The Bundesbank is responsible for implementing the council’s monetary policy decisions in Germany. 

The ECB's Governing Council is a body within the ECB responsible for making monetary policy decisions for the eurozone area. The ECB’s main mandate is to maintain price stability in the eurozone by ensuring that inflation does not exceed 2% in the medium term. 

The council controls inflation by adjusting ECB interest rates, either raising them to slow spending or lowering them to spur consumption.

Other Bundesbank’s tasks are supervising credit institutions at the national level, which includes a role in the European Single Supervisory Mechanism. It also supervises cash management, payment systems and financial stability. 

The Frankfurt-based central bank manages Germany's foreign reserves, serves as the government's fiscal agent, and performs critical statistical functions. It also advises the Federal Government on monetary policy matters.

A six-member executive board heads the Bundesbank. Half of its members are nominated by the Federal Government and half by the Bundesrat (Germany's upper house of parliament). All members are appointed by the German President. 

The Bundesbank is not subject to third-party instructions, including those from the Federal Government.

Deutsche Bundesbank’s interest rates history

Before the integration of European economies into the Eurosystem in 1999, there were two key interest rates in Germany that the Bundesbank used as its monetary policy tools: the discount rate and the Lombard rate. 

The discount rate was Germany's interest rate charged by the Bundesbank on short-term loans to commercial banks secured by bills of exchange. 

The Lombard rate was Germany's interest rate on the “Lombard loans” extended by the Bundesbank for banks to bridge temporary liquidity gaps, according to the Frankfurt Stock Exchange. The Lombard rate, in turn, determines the interest rate on bank loans made to credit customers. As a result, it affected interest rates in the money markets. The Lombard rate was typically one to two percentage points higher than the discount rate.

Germany's interest rate history shows that the Bundesbank implemented the discount rate and the Lombard rate from 1948 to 1998. It has ceased to set the Germany interest rates since 1 January 1999, with the transfer of monetary policy power from the Bundesbank to the European System of Central Banks.

Like in any member of the European System, Germany’s benchmark interest rate is set by the ECB. The official key interest rate is the ECB’s main refinancing operations (MRO) rate.

The MRO is also known as the 'refi rate'. It is used when banks borrow money from the ECB on a weekly basis in exchange for security and at a set interest rate. 

The MRO is one of three interest rates the ECB uses as its monetary policy instruments tool kit. The other two interest rates are the deposit facility and the marginal lending facility. 

Data shows that the ECB started its low-interest rate policy in October 2008 in the midst of the global financial crisis. The central bank in the eurozone area cut its MRO by 50 basis points to 3.75%. 

From October 2008 to July 2012, the ECB adjusted the refi rate several times, which lowered the rate to 1% by July 2012. In the two years between July 2012 and September 2014, the ECB cut the refi rate four times, bringing it down to 0.05% in September 2014. 

The ECB maintained the 0.05% rate until March 2016, when it reduced the refi rate by 5 basis points to 0.00%. The central bank paused any adjustments to the refi rate and kept its zero-interest-rate policy in place until 27 July 2022.

On 27 July 2022, the ECB raised all three interest rates for the first time since 2011 to tame soaring inflation in the eurozone. The refi rate was lifted to 0.50%. 

European Central Bank rate history

Germany’s inflation rate in 2022

Data on Germany's inflation rate history from the country’s Federal Statistical Office (Das Statistische Bundesamt) shows the country had a low inflation rate from 2018 to 2020 before picking up in 2021. The annual inflation rate stood at 1.8% in 2018, 1.4% in 2019, and 0.4% in 2020, accelerating to 3.1% in 2021.

Germany's inflation rate in 2022 has started to accelerate from January at 4.9%, rising to 5.1% in February. The country’s inflation rate surged to above 7% in March, peaking at 7.9% in May

Consumer price index

Rising energy prices were the main contributor to soaring inflation. The war in Ukraine has accelerated already elevated energy prices in Germany and the rest of Europe, particularly due to problems with gas supply from Russia. 

Germany sources more than a quarter of its energy from gas, which it mostly imports, according to the International Monetary Fund (IMF). As of end-April 2022, about 35% of Germany’s natural gas imports at 33 billion cubic meters (bcm) a year came from Russia.


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Russia has been reducing gas flows to Germany from the Nord Stream 1 pipeline. Before Russia invaded Ukraine on 24 February this year, Germany imported more than 50% of its gas use from Russia through Nord Stream 1. 

Apart from energy, soaring food prices also contributed to record-high inflation in May. 

Since May’s peak, the annual inflation rate in Germany slowed to 7.6% in June and 7.5% in July. High energy and food prices remained the main contributors to the inflation rate in Europe's largest economy. 

Germany’s harmonised index of consumer prices (HICP) inflation rose 8.5% in June year-over-year (Y0Y), but it has dropped from a peak of 8.7% in May.
Consumer prices indices for Germany

Key drivers affecting ECB interest rate decision

The ECB, like any other central bank, looks into inflation, growth domestic products (GD) and unemployment rate readings to adjust interest rates. As Europe’s central bank is set to meet in September, the outlook for the three key metrics will help the ECB set the eurozone interest rate

Inflation expected to slow

The euro area’s annual inflation rate was confirmed at 8.9% in July 2022, up from 8.6% in June, according to the latest data from the European Union’s statistical office, Eurostat

According to the ECB's summer economic forecast, annual average inflation may reach a historical high in 2022, hitting 7.6% in the euro area and 8.3% in the EU as the prolonged war in Ukraine has kept prices for food and energy elevated.

In 2023, the bank predicted that pressure from rising energy prices and supply issues would lessen, bringing the inflation rate down to 4.6% in the EU and 4.3% in the euro area.

GDP growth to soften in near term

The ECB expected that real GDP in the EU would rise by 2.7% in 2022 before slowing to 1.5% in 2023. According to estimates, the euro area's GDP will grow by 1.4% in 2023, as opposed to 2.6% in 2022.

Participants in the ECB Survey of Professional Forecasters (SPF) for the third quarter of 2022, reduced their estimate for the eurozone's GDP by 0.1 percentage points to 2.8%. 

It predicted that the EU’s GDP would grow at 1.5% in 2023 before picking up to 1.8% in 2024. The estimates for 2023 represented a 0.8% downward revision.

As for Germany, the country’s GDP growth slowed to 0.1% in the second quarter of 2022 – down from 0.8% in the first quarter – according to data from Germany’s statistical office on 25 August. GDP in the second quarter rose 1.8% compared to the second quarter of 2021. 

The Bundesbank in its August monthly report said that the probability of GDP declining in the approaching fourth quarter of 2022 and the first quarter of 2023 has increased considerably owing to unfavourable developments in the gas market. 

“German economic output in the third quarter is likely to stagnate again more or less. The high level of uncertainty surrounding the supply of gas over the coming winter and the sharp increases in prices are likely to place a considerable strain on households and enterprises,” it said.

In June, the Bundesbank slashed its forecast for Germany's GDP growth for 2022 to 1.9% from 4.2% in its December 2021 forecast. It estimated the country’s GDP to grow by 2.4% in 2023, a downward revision from 3.2% in the December forecast. 

Carsten Brzeski, ING Group’s Global Head of Macro, in a note on 15 August said that Germany's economy is set to enter recession on the back of high energy and commodity prices, ongoing supply chain frictions and the war in Ukraine. 

On top of these, dry weather, which has slashed water levels in the country’s Rhine river, a new gas levy and high inflation are forecast to cut Germany’s GDP growth. 

“With the new levy and the impact from the low water levels, inflation rates at double-digit levels almost look like a done deal for the final quarter of the year and it would need an economic miracle to avoid a recession in the second half of the year,” Brzeski said.

ING forecast GDP growth for Germany at between 0.5% and 1% for the full year of 2022. 

Unemployment rate to drop in the near-term

The unemployment rate for the euro area was 6.6% in June, steady from May and down from 7.9% in June 2021, according to data from the Eurostat on 1 August.  The EU unemployment rate was 6.0% in June 2022 – stable compared with May 2022 and down from 7.2% in June 2021. 

According to Eurostat’s data, the unemployment rate in Germany eased slightly to 2.8% in June 2022 from 2.9% in May and 3.6% in June 2021. 

Respondents in the ECB’s survey predicted the unemployment rate in the eurozone to steady at an average of 6.7% in 2022 and 2023. The percentage of the number of unemployed people is expected to drop slightly to 6.6% in 2024 and to 6.4% in 2027.

Germany inflation forecast: Analyst view

The Bundesbank in its June economic outlook revised the HICP inflation rate for 2022 to 7.1% from 3.6% in its December outlook. The bank expected the inflation rate to ease to 4.5% in 2023 and 2.6% in 2024. 

However, the inflation forecast made in June was higher than December’s estimates of 2.2% HICP inflation rate for both 2023 and 2024.

“HICP inflation is expected to come down only very slowly over the remainder of the year. This is because price pressure will remain high for now: the assumption is that crude oil prices will fall markedly, but, at the same time, other significant cost increases for fuel and heating oil are likely to persist for a while yet,” the bank said. 

“Furthermore, the previous huge increase in market prices for natural gas will probably continue to be passed on to consumers. It is likely that price rises have not yet reached their peak where food is concerned, either.”

Germany's inflation forecast on 22 July from the IMF expected it to average 7.7% in 2022, cooling to 4.8% in 2023 as energy prices stabilize. 

“Inflation expectations five years into the future remain anchored near the European Central Bank’s target of 2 percent,” the IMF said.

ING expected German’s inflation to average at 7.8% in 2022, retreating to 3.4% in 2023 and 1.8% in 2024. 

ABN-Amro forecast Germany’s inflation to remain elevated. It revised Germany’s inflation forecast for 2022 to 7.7% in June, up from a previous forecast of 6.5%. The country’s inflation rate is expected to ease to 3.9% in 2023, but it was also an upward revision from 2.7% in its previous estimates. 

TD Economics projected Germany’s inflation rate in 2022 to surge to 7.3% from 3.2% in 2021, before dropping to 3.5% in 2023. 

The bottom line

Forecasts from the Bundesbank, IMF and several banks showed that Germany’s inflation rate in 2022 could soar to above 7%. The rate was expected to fall in 2023 but still be above the ECB's target of 2%. 

Remember that analysts’ views can be wrong. Forecasts should not be used as a substitute for your own research. Always conduct your own due diligence before trading or investing. And never invest or trade money you cannot afford to lose.


What is the interest rate in Germany?

Germany’s key interest rate is set by the ECB, which is currently at 0.5% for the main refinancing operations (MRO rate).

Where will interest rates be in 2023?

Germany’s interest rate forecast will depend on decisions made by the ECB. Analysts have forecast further ECB’s interest rate hikes in the remainder of 2022 and in the first quarter of 2023. 

ING forecast the ECB to lift interest rates from the current level to 1% in the third quarter and keep it there until the final quarter of 2024. 

ABN-Amro estimated the ECB’s key interest rate to average 0.75% in 2022, rising to 1% in 2023.

It should be noted that analysts' predictions can be wrong. Forecasts should not be used as a substitute for your own research. Always conduct your own due diligence before trading or investing. And never invest or trade money you cannot afford to lose.

Why do interest rates rise?

Central banks raise interest rates to curb soaring inflation. Higher interest rates are expected to discourage consumers and businesses to spend money, lowering demand and reducing prices.

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