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'Economic boom'

Rates are already at a five-year high of 3.5% and recent signs pointing to a sustained upturn in Germany, Europe's largest economy, could force the European Central Bank to act again.
Unemployment has fallen to a four-year low and a boom in exports has pushed the trade surplus to a record high.

Leading companies reported strong profit figures in the last quarter.

In its latest survey of 7,000 businesses, Ifo found that confidence is at its highest level since it began its research in 1991.

The result exceeded analysts' expectations.

"The German economy is experiencing a very strong economic boom, as last observed in 1990," Ifo said in a statement.

Inflation watch

Consumer spending has been boosted in recent months by people making large purchases ahead of the rise in VAT to 19% on 1 January.

Economists believe the tax rise, designed to boost the public finances, is unlikely to derail the pace of economic recovery.

"Companies still expect a pick-up, even if a dip comes at the start of the year due to the sales tax increase," said Andreas Scheuerle, an economist with DekaBank.

But the strong economic indicators have raised concerns about inflationary pressures and how far the ECB will go to address these.

"We expect another rate hike in the first quarter, and after today's Ifo data, one has to reconsider whether another hike might follow that," said Daniel Hupfer, from investment bank MM Warburg.