Exclusive: ECB Insider: March Forecast Revision Unlikely To Be as Big as Market Thinks

24 February 2023

Exclusive: ECB Insider: March Forecast Revision Unlikely To Be as Big as Market Thinks
- ECB insider: Updated forecasts will maintain view of more persistent inflation dynamics
- ECB insider: Don’t expect any material change in core inflation dynamics in 2023
- ECB insider: Not seeing much inflation from the end of China’s zero-Covid policy

By David Barwick – FRANKFURT (Econostream) – The European Central Bank will revise its macroeconomic projections in the anticipated direction next month, but - at least with respect to inflation - possibly not by as much as observers currently think, in the view of a Eurosystem insider who spoke to Econostream recently.

‘If you look at the consensus forecast, it is for growth to be corrected up and inflation down’, this person said. ‘We will employ the same narrative with the same arguments. The point is the magnitude of the revision.’

‘And we are going to revise growth up and inflation down, I’m pretty sure about that, but I don’t think we are going to move as close to market expectations as people may think’, he continued. ‘I think we are going to still maintain our perspective that inflationary dynamics are going to be more persistent.’

That the updated forecasts would continue to support the idea of relatively stubborn inflation would be despite markedly weaker energy price developments since the ECB’s December projection exercise, he noted explicitly.

This person rejected the assertion that the ECB, which will release the new forecasts on March 16, would be motivated by any desire to avoid the appearance of having been reckless in making very substantial upward inflation revisions the last time. The March outcome would be ‘mostly a technical decision’, he said, even if the cut in the inflation outlook was, he reiterated ‘not going to be as much as consensus.’

The element of judgment that contributed to December’s hefty upside corrections ‘was justified after many quarters of surprises to the upside’, he said. That this judgment entered, potentially, ‘precisely at the turning point’ of inflation would be ‘unfortunate’, but for a final verdict it remained early, he said.

If the approach at the ECB was influenced by expectations of energy price developments that turned out to be wrong, he observed in this connection, these expectations were in any case based as usual on futures markets.

‘So, to the extent that futures markets have been surprised, we are surprised, too’, he said. 'Energy is decelerating much faster than we were expecting, the bottlenecks are also easing relatively fast, and we are not seeing any inflationary impact from the end of the zero-Covid policy in China’, he said.

The new projections would naturally acknowledge changed circumstances, he said.

‘But the critical point here is that I don’t anticipate any material change – and this was the most important element in the judgment in December – in the core inflation dynamics in the forecasts for 2023’, he said. ‘And this is important. In the forecasts for 2023, most likely, there won’t be any change in the core inflation.’

As for 2024 and 2025, that required discussion, he said. In this respect, a key question would be: ‘Do we need to change our judgment about the impact of the inflationary factors on core inflation in 2024, for instance, second-round effects, corporate margins, wages, the exchange rate?’, he said. ‘This is to be decided.’

The other fundamental decision concerned the extent to which the impact of the latest energy price declines would be felt in the future, he said. The expected lag suggested no deflationary effect this year, he said.

As for next year, one of the most vexing questions was whether the speed of this impact would be symmetric with the previous, opposite effect of earlier energy price increases, he said. This depended on many factors, he said.

A ‘critical’ issue in the December exercise that would again play a key role was the assessment of fiscal policy’s inflationary implications, he said. In addition to revisiting the question of how many government measures assumed for 2023 would actually be implemented, there was the matter of distinguishing between those that would reduce inflation in any event and those whose effect, if any, depended on energy prices.

This reassessment, ceteris paribus, would presumably involve a slight increase in inflation this year and a reduction next year, he said.

China’s role in European inflation had meanwhile become ‘less important’, he said.