The European Central Bank (ECB) has almost doubled its inflation forecast for 2022. Your economists are now predicting an average rate of inflation in the monetary union of 3.2 percent, as the ECB announced in Frankfurt on Thursday. In September they had assumed 1.7 percent.
For the year 2021, which is coming to an end, the ECB has had to revise its inflation forecast upwards several times, and significantly. Initially, in January she assumed that the inflation rate this year would be 0.9 percent on average. Most recently, she had expected 2.2 percent. But the annual average is expected to be 2.6 percent. In November, the inflation rate in the euro zone reached 4.9 percent.
“Inflation is likely to remain high in the short term, but will weaken in the course of the coming year,” now suspects ECB President Christine Lagarde. She justifies this as follows: “Energy prices have risen significantly, while in some industries there is a shortage of materials, equipment and labor.” For this reason, the rate of inflation will probably remain above the 2 percent mark that the ECB has set itself as a target for most of the next year.
For the first time, the ECB is looking even further into the future. Their forecast also extends to the years 2023 and 2024. In the year after next, the rate of inflation will be 1.8 percent again – previously the ECB had assumed 1.5 percent – and it will remain at this level in 2024.
A sharp rise in inflation puts the ECB under massive pressure in the medium and long term, as it makes it increasingly difficult for the ECB to justify its ultra-loose monetary policy. The ECB officially justifies its policy with its inflation target, which envisages an annual inflation rate averaging two percent. If prices continued to rise above this level, the ECB would actually be forced, in accordance with its own objectives, to raise interest rates and end its bond purchase programs. But observers doubt that that will happen.
The ECB will let its bond purchase program PEPP, which it started in the wake of the Corona crisis, expire in March 2022. The older APP purchasing program will continue to run indefinitely for the time being, and there is also no sign of a turnaround in interest rates. Many also consider an increase in the key interest rate unlikely, because at the core, they say, the ECB is interested in something else: It wants to protect the heavily indebted countries.
“Even moderate rate hikes could immediately affect the debt sustainability of most EU member states,” says market analysis Norbert Tofall. “And a turnaround in interest rates that deserves the name is likely to blow the debt sustainability of some EU member states such as Italy. It is obvious that an Italian national bankruptcy would have repercussions for the entire euro area. ” France’s debt sustainability will also be burdened enormously, even with moderate rate hikes.
The ECB will therefore find it easier to justify its measures if it reckons with lower inflation below two percent again at least from the year after next. Some observers also criticize the ECB’s forecasting tools: They would ignore the role of the ECB as a driver of inflation because they did not take sufficient account of the monetary expansion caused by the ECB.