In ECB Survey of Professional Forecasters for Q2 2023, respondents downgraded their expectations for headline HICP inflation in 2023 downward. The lower headline inflation expectations are primarily attributed to expectations of reduced energy price inflation, particularly for natural gas. Headline inflation expectations for 2023, 2024, and 2025 are now at 5.6%, 2.6%, and 2.2%, respectively, compared to Q1 forecasts of 5.9%, 2.7%, and 2.1%.

On the other hand, expectations for HICP inflation excluding food and energy in 2023 were revised upward, primarily results from recent data outturns and higher wage growth forecasts. Core inflation projections are at 4.9% in 2023, 2.8% in 2024, and 2.3% in 2025, comparing to prior forecasts of 4.4%, 2.8% and 2.3% respectively.

Real GDP growth is now projected at 1.2% in 2023, 1.6% in 2024, and 1.4% in 2025, compared to prior forecasts of 1.4%, 1.7%, and 1.4%.

Full release here of ECB SPF here.

In a speech, ECB President Christine Lagarde said that the central bank focus on “medium term, not on current inflation numbers”. “When inflation pressure is expected to fade – as is the case today – it does not make sense to react by tightening policy,” she added. “The tightening would not affect the economy until after the shock has already passed.”

Lagarde also said, “supply shock” will tend to “push up inflation and depress output. In this case, “tighter monetary policy would only exacerbate the contractionary effect on the economy.” The Eurozone is facing a “mixture of shocks”, partly related to catch-up demand but has a “strong supply-driven element”. “Tightening policy prematurely would only make this squeeze on household incomes worse.”

“The conditions to raise rates are very unlikely to be satisfied next year,” she said. “Moreover, even after the expected end of the pandemic emergency, it will still be important for monetary policy – including the appropriate calibration of asset purchases – to support the recovery and the sustainable return of inflation to our target of 2%.”

Full speech here.

In an interview by De Tijd, ECB Executive Board member Isabel Schnabel noted that “given the high uncertainty about the persistence of inflation, the costs of doing too little continue to be greater than the costs of doing too much.”

She emphasized “once inflation has become entrenched in the economy, it becomes much more costly to fight it,” adding that “We have more ground to cover. It will depend on the incoming data by how much more rates will have to increase.”

On the topic of market expectations of two more additional 25bps hikes, Schnabel remained data-driven. She responded, “That will depend on the incoming data. Let me be very clear: A peak in underlying inflation would not be sufficient to declare victory: we need to see convincing evidence that inflation returns to our 2% target in a sustained and timely manner. We are not at that point yet.”

Regarding monetary policy transmission precess, Schnabel explained, “A rise in the policy rate first has an impact on financing conditions, then on the real economy, and ultimately on wages and prices.” She revealed that ECB’s staff analysis suggests the effects of tighter monetary policy are currently in progress, with the impact on inflation expected to peak in 2024.

However, Schnabel cautioned that uncertainty persists around the strength and speed of this process, admitting, “it may take longer than was previously the case to see the impact of our policy.”

Full interview of ECB Schnabel here.