The European Central Bank building, in Frankfurt, Germany, on Dec. 15, 2022.WOLFGANG RATTAY/Reuters
Consumer expectations for euro zone inflation in the coming years edged up, a new European Central Bank survey showed on Tuesday, likely adding to worries that the decline in price growth could stall above the bank’s target.
The ECB has raised rates at each of its past nine meetings to a more than two-decade-high but policymakers are now debating whether to pause this month given a rapid deterioration of the growth outlook that is raising recession fears.
Possibly adding to the case for a hike, the ECB’s own Consumer Expectations Survey showed inflation expectations three years ahead rising to 2.4 per cent in July from 2.3 per cent in June, above the ECB’s 2 per cent target.
Median expectations for inflation over the next 12 months were meanwhile unchanged 3.4 per cent, breaking a trend for a steady decline since the spring.
The ECB has predicted a rapid fall in price growth this year but much slower disinflation in 2024 with some policymakers even warning that the “last mile” of disinflation could be so drawn out that price growth could bounce back and stay clear of the target.
Indeed, market based expectations see longer-term inflation at around 2.6 per cent, indicating that investors lack confidence in the bank’s willingness to exert enough pain on the economy to bring price pressures down.
Still, consumers continue to see an economic contraction ahead and growth expectations for the next 12 months were downgraded to –0.7 per cent from –0.6 per cent, the ECB said.
Unemployment expectations were, however, unchanged even if consumers saw slightly slower nominal income growth.
“The drop in expected nominal income growth was primarily driven by respondents from the lowest income quintile,” the ECB added.
Markets only see a one in four chance of a hike on Sept 14 but still expect that a 25 basis point increase to 4 per cent would happen before the end of the year, before rate cuts from mid-2024.