The European Central Bank lowers its inflation forecast to 2% in 2025

The European Central Bank lowers its inflation forecast to 2% in 2025

The European Central Bank is once again avoiding giving hints about when it might cut the eurozone’s benchmark interest rates again, after agreeing at the beginning of June to its first cut since 2019. What’s more, its president, Christine Lagarde, warned yesterday that the body “will need time” to ensure that inflation does not surprise negatively and will decline as expected to reach its stable 2% target in the medium term in the latter part of next year. “We have come a long way in the fight against inflation,” she said, but “our work is not over and we must remain vigilant.” The senior French official thus used her opening speech at the ECB’s annual Central Bank Forum in Sintra, Portugal, to calm market expectations of further cuts.

“We still face many uncertainties about future inflation, particularly regarding how the relationship between (business) profits, wages and productivity will evolve, and whether the economy will be affected by further supply-side shocks. It will take time to gather enough data to be confident that the risks of above-target inflation have passed,” Lagarde said.

The ECB president also tempered expectations that possible new rate cuts would coincide with the ECB’s quarterly review of its macroeconomic forecasts (next, in September and December), unlike last year’s related monetary policy decisions. He cautioned that “our assessment of the inflation outlook is based on our own forecasts, but not exclusively.” Likewise, he stressed that his analysis is not based on a single piece of data, perhaps in a veiled reference to wage developments: “While the flow of new information is increasing and is constantly improving our view on medium-term inflation, there are no specific data pressures for us.”

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No later than October 2022

After peaking at 10.6% in October 2022, eurozone inflation has fallen to 5.2% in September (the last rate hike) and 2.6% in June (the first cut). The main interest rate is 4.25%, while the deposit rate – the interest you pay for money you keep in banks, and the most important in the current context – is 3.75%. However, inflation has entered a more resistant path to further decline, and the ECB needs to be more confident that wage growth is moderate as expected and that corporate profits are absorbing some of this rise without passing it on to customers. It is also hanging by a thread on geopolitical issues.

The eurozone economy has been stagnant for five quarters, “but this time the costs of fighting inflation have been contained compared to similar events in the past.” However, at this point he also wanted to offer a warning: “Given the magnitude of the inflation shock, a soft landing (for the economy) is not yet guaranteed.”

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