ECB: Longer-Term Inflation Expectations Mostly Around 2%, But Must Closely Monitor

22 September 2022

By David Barwick – FRANKFURT (Econostream) – Longer-term inflation expectations in the euro area are generally near 2%, but some related developments require close watching, the European Central Bank said on Thursday.

In its sixth economic bulletin of 2022, the ECB said that ‘[s]urvey-based measures of longer-term inflation expectations continued to increase gradually, reaching levels around or slightly above 2%, while market-based measures declined beyond the very near-term maturities, amid significant volatility.’

Citing its July Survey of Professional Forecasters (SPF), the ECB said that expectations for 2026 HICP climbed again, reaching 2.2% and thus slightly outpacing the 2.1% result of Consensus Economics. However, the median and the mode of the SPF held steady at 2%, the ECB said.

The ECB’s Survey of Monetary Analysts showed medium- to long-term expectations also unchanged at 2% in July, while its Consumer Expectations Survey indicated an increase in expectations of inflation in three years.

As for market-derived indicators, these were subject to considerable volatility recently, but compensation for inflation decreased on expectations of more monetary tightening and worries around the growth outlook, the ECB said.

‘According to these market-based measures, inflation is now expected to return to around 2% over the course of 2024 and remain close to that level thereafter, with the five-year forward inflation-linked swap rate five years ahead standing at 2.2%’, according to the ECB, which emphasised that these did not directly reflect inflation expectations, as they included risk premia for uncertainty.

‘The relative stability of survey-based measures of long-term inflation expectations, which are free of inflation risk premia, suggests that the current volatility in long-term market-based measures predominantly reflects variation in inflation risk premia’, the ECB said.

The bulletin repeated much of the ECB’s recent communication, describing the 75bp rate hike two weeks ago as a frontloading of ‘the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the Governing Council’s 2% medium-term target.’

‘Based on the Governing Council’s updated assessment, over the next several meetings it expects to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations’, the bulletin continued. ‘The Governing Council will regularly re-evaluate its policy path in light of incoming information and the evolving inflation outlook. Its future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.’

‘The Governing Council took this decision, and expects to raise interest rates further, because inflation remains far too high and is likely to stay above its target for an extended period’, the ECB added.