Consumer inflation expectations in the euro zone have significantly declined, easing pressure on ECB to tighten aggressively its policy. However, recent comments from policymakers suggest the hiking cycle will continue in the short term, at least until this summer.
The ECB’s monthly survey revealed that expectations for inflation over the next 12 months dropped from 5% in March to 4.1% in April. Similarly, expectations for inflation three years ahead decreased from 2.9% to 2.5%, moving closer to the ECB’s medium-term target of 2%.
In addition, the European Commission’s inflation expectations survey for the coming year recorded its lowest level since 2020. Separately, other indicators have been encouraging. In May, inflation slowed to 6.1%, while an underlying measure, excluding volatile elements such as energy, weakened more than anticipated to 5.3%.
The ECB’s imminent interest rate hike next week will factor in the surveys’ findings to determine the duration of elevated borrowing costs required to steer inflation back to target levels. However, yesterday, Boris Vujcic, a member of the ECB’s Governing Council, stated that price risks continue to lean towards higher inflation.
In the meantime, ECB President Christine Lagarde reiterated that interest rates will rise further to regain control over prices, emphasizing that there is no definitive evidence indicating the peak of underlying inflation. Lastly, Klaas Knot, head of the Dutch central bank and a hawkish member of the ECB’s Governing Council, cautioned that the euro area is currently witnessing second-round effects resulting from increased energy costs. He suggested that bringing down consumer prices may prove more challenging as these price pressures infiltrate wages and services.
Bottom line: Despite positive signs, ECB policymakers seem on track to keep raising rates in the short term with market participants expecting two more hikes. Challenges lie ahead as the effects of higher energy costs spill over into other sectors, raising fears the current level of interest rates aren’t sufficient to to rein in consumer prices.
