Financial experts estimate: ECB inflation target likely far off

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Although they expect a decline in the coming years, the inflation target of the European Central Bank (ECB) should not be met until 2025 at the earliest, according to a study published Tuesday by the Mannheim-based economic research institute ZEW.

In particular, the 181 financial experts surveyed expect rising wages to put pressure on inflation in the euro area. On the other hand, falling energy prices and the ECB’s tighter monetary policy with a series of rate hikes led to falling inflation expectations among some experts.

In the May survey, the financial market experts expect average inflation rates of 5.8 percent, 3.5 percent and 2.5 percent for the years 2023, 2024 and 2025. In February, the experts had estimated inflation for this year at 6 percent. In comparison, the ECB sees its goal of stable prices in the medium term at an inflation rate of two percent.

“For the first time since the start of the survey, the inflation expectations of the financial market experts have fallen slightly,” says economist Frank Brückbauer of ZEW’s research department for old-age provision and sustainable financial markets. However, they stabilized at a high level.

The surveyed financial experts are more pessimistic with their estimates than the ECB, which expects an average inflation of 5.3 percent this year. High inflation is a major problem for consumers: it affects their purchasing power and people can afford one euro less.

After years of zero and negative interest rates, the ECB has responded to the persistently high inflation in the euro area since July 2022 with a series of seven rate hikes – too late, according to its critics. The main interest rate at which commercial banks can get fresh money from the central bank is now 3.75 percent.

Higher interest rates make borrowing more expensive, which can dampen demand and curb high inflation rates. However, it takes time for the mechanism of monetary policy to kick in. According to the Eurostat statistics office, inflation in the euro area was 7 percent in April. ECB President Christine Lagarde has recently shown her determination in the fight against inflation.

In the ZEW survey, a 70 percent majority of financial experts said they have raised their inflation forecasts since February because of wage developments. The green transformation of the economy is also largely seen as a driver of inflation. Almost half of the experts have therefore raised their prognosis. According to 48 and 39 percent respectively, the development of energy prices and the monetary policy of the ECB will have a dampening effect on inflation.

In May, 1,181 financial experts from banks, insurance companies, investment companies and finance departments of medium to large German companies were interviewed for the survey. According to the ZEW, these were mainly economists or analysts.

(SDA)

Source: Blick