ECB Insight: Latest Expectations Survey Not Final Nail in Coffin of Sep Hike, But Helps Shift Burden of Proof to Hawks

8 August 2023

By David Barwick – FRANKFURT (Econostream) – The option of a pause at the 14 September meeting of the European Central Bank Governing Council has hardly clinched the outcome, but the ECB’s latest consumer expectations survey, released Tuesday, is more wind in the sails of the Council doves.

According to the survey, median expectations for inflation over the next 12 months fell substantially in June, coming in at 3.4% after 3.9% in May and 4.1% in April, whilst median expectations for inflation three years hence were also down, at 2.3% after 2.5% in both May and April.

That suggests that the inflation rate anticipated by consumers has come within striking distance of the ECB’s 2% price stability target. June’s 2.3% reading for inflation expectations at the three-year horizon is the lowest since 2.1% in February 2022, just before the measure surged.

There can be little doubt that this development is reassuring for the ECB, which has fretted about the possibility of expectations coming unanchored. Whilst not the only measure of expectations, where euro area consumers think prices are going has implications not lost on the ECB for the confidence it can have in its ability to restore price stability.

‘First, the process of disinflation has been set in motion, pushing inflation expectations down’, ECB Executive Board member Fabio Panetta said in a speech just last Thursday arguing in effect for a pause. ‘From March onwards, we have observed a consistent decline in consumer expectations for inflation over a 12-month horizon.’

True, Panetta sits at the dovish wing of the Council. But the principle of consistency argues that National Bank of Belgium Governor Pierre Wunsch, close to the opposite extreme of the spectrum, would also have to be relieved to see the decrease in consumer expectations, given that he warned last November with respect to these that ‘there is something taking place there’ that needs monitoring.

And it is not as though the doves have been uniformly willing to ignore the threat to the effectiveness of ECB monetary policy emanating from surging consumers expectations. Last September, Bank of Spain Governor Pablo Hernández de Cos noted with concern that the ECB’s survey was then showing median 3-year inflation expectations at 3%, versus just above 2% at the beginning of 2022.

‘We will remain extremely vigilant to these indicators in the coming months’, he said. ‘Indeed, the need to protect ourselves against this risk is one of the reasons for the acceleration in monetary normalization that our latest decisions have entailed.’

It is thus clear that consumers’ more relaxed view of where price growth is headed will ease what pressure remains on the Governing Council to opt for another hike next month. At Econostream, we continue to think that a pause is the more likely decision.

That said, there are plenty of data yet to come, such as spot inflation data for August and, most importantly, the updated Eurosystem staff macroeconomic projections.

Today’s consumer expectations survey is not even the final word on that subject before the next monetary policy meeting of the Council; the next survey results are to be released on 5 September. Inflation expectations captured by the survey are not without volatility, so a setback of sorts cannot be excluded. Still, it seems unlikely that any setback would call into question the more favourable trend of late.