The Latest Unofficial Forecast of European Inflation Makes the Market Worry, Here's Why!


 The European Central Bank expects inflation to remain above its 2% target for the next three years, one of the sources said. Inflation is seen to be above market expectations at the moment and signals the ECB's fight against rising prices is far from over.

The ECB looks set to raise interest rates for the fourth time in a row on Thursday to curb inflation, and will also announce a new quarterly economic projection, which investors use to gauge how many more hikes are likely.

Driven by factors ranging from Russia's invasion of Ukraine to the impact of the pandemic-era stimulus, inflation in the 19 countries that use the euro reached 10.6% in October before falling again last month.

The new projection will put inflation comfortably above 2% in 2024 and just above it in 2025, said the source, who did not want to be identified because the forecast is not yet official.

The new forecast, which is considered important in informing the ECB's policy moves until a new round of estimates is published in March, is higher than the market currently expects for the two years.

A spokesperson for the ECB declined to comment. On the other hand, the ECB's forecasts rarely prove to be accurate but the bank still uses them as input in its decisions because it targets the "medium term", compared to the current, inflation and any changes it makes take several months to realize the economy.

Some ECB policymakers, particularly among those in favor of higher rates, have recently voiced doubts about the ECB's forecasts and called for a greater focus on current readings.

Economists polled by Reuters forecast inflation at 6.0% in 2023, 2.3% in 2024 and 1.9% in 2025. They also expect the ECB to raise its deposit rate by 50 basis points to 2% on Thursday before taking it to 2.50% by March and 2.75% by the middle of next year.

The ECB is also seen letting 175 billion euros ($186.01 billion) worth of debt mature next year, out of the 5 trillion euros it holds, to flush cash from the banking system and raise long-term borrowing costs.

Some members of the ECB's Governing Council, such as Bundesbank President Joachim Nagel, have called for this "quantitative easing" to begin by March, while more dovish members expect it to be pushed forward.