FRANKFURT – Euro zone inflation is set to be higher than forecast just a few months ago and even longer-term expectations are moving above the European Central Bank’s 2% target, a fresh ECB survey showed on Friday.
Fearing that runaway inflation could get out of control, the ECB raised rates by a bigger-than-expected 50 basis points on Thursday and promised further hikes in the months ahead, even as growth is set to suffer from sky high energy prices.
Consumer prices are now seen rising by 7.3% this year, above a 6.0% projected three months ago while they are likely to grow by 3.6% next year, more than the 2.4% predicted earlier, the ECB said in its quarterly Survey of Professional Forecasters.
A key input in policy deliberations, the survey also showed longer term expectations at 2.2%, above the 2.1% seen earlier and pointing to a steady rise in expectation, which had been stuck well below the ECB’s target for much of the past decade.
Even underlying inflation expectations moved to 2.2% from 1.9% – one of the biggest jumps in longer-terms expectations in the survey’s history.
Arguing for months that high inflation would prove transitory, the ECB kept policy ultra easy even as most peers were raising rates rapidly. But the bank has now acknowledged the inflation dangers and looks set to keep tightening at each of its upcoming meetings this year.
The biggest hurdle for rates hikes will be the state of the economy, as the fallout from Russia’s war on Ukraine is already weighing on growth and a complete loss of Russian gas in the coming winter would push the bloc into recession.
The ECB survey now sees growth this year at 2.8% this year, just below the 2.9% seen earlier. In 2023, growth is expected at 1.5%, well below the 2.3% projected in April.
(Reporting by Balazs Koranyi; Editing by Francesco Canepa)