German investor sentiment surged in January, reflecting growing confidence that its powerful export machine will create new jobs and investments this year to spur further robust growth. The Mannheim-based ZEW think tank said about 50 percent of investors now expect the European Central Bank will have to raise interest rates within the next six months, a few months earlier than markets are currently pricing in.
The ZEW's monthly index jumped to 15.4 points from a reading of 4.3 in December, its highest level since last July and easily surpassing the consensus forecast of 6.8 points in a Reuters poll of 36 economists. Foreign exchange markets seized on the news, bidding up the euro and selling the dollar although the single currency later gave up some of its gains to trade back around the $1.34 mark.
"The German economy is cruising along safely. It looks as if there is almost blind trust in the strength of the German recovery," said ING Financial Markets economist Carsten Brzeski. ZEW economist Michael Schroeder told reporters on Tuesday that widening divergences would place ECB policymakers in a tight spot as interest rates are too low for Germany and too high for ailing eurozone states like Greece and Ireland.
"We have a strong divide in macroeconomic developments and I don't know how the ECB can make it right for everyone," he said, adding that most investors surveyed believe the bank will face a pick up in inflation over the coming six months. "About 50 percent of participants expect an increase in policy rates over the next six months, while about 50 percent see them staying the same," Schroeder said.
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