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The European Central Bank’s new projections show inflation below the 2% target in both 2023 and 2024, according to officials familiar with the matter, giving President Christine Lagarde ammunition to argue against a swift increase in interest rates.
While consumer-price growth for next year will be stronger than the 1.7% predicted in September and above the goal, it will then slow over the forecast horizon, the officials said. They asked not to be identified because such numbers are confidential.
The projections, which extend to 2024 for the first time, are a key input in formulating the ECB’s post-pandemic policy path. The outlook isn’t official until published by the Governing Council after its decision on Thursday. An ECB spokesman declined to comment.
The upcoming meeting is likely to be one of the most significant since Lagarde took office in 2019 as policy makers discuss changes to conventional asset purchases and how to reinvest maturing debt after the end of emergency bond-buying in March.
Economists don’t expect the first rate increase until 2023 at the earliest. Money markets are betting on a 10 basis-point hike in December 2022 and see the deposit rate — currently at -0.5% — climbing to zero in six years’ time.
Read more: ECB INSIGHT: How a $40 Energy Shock Hits Inflation Forecasts
Lagarde has been at pains to guide investors against anticipating such an early move, insisting that the current surge in inflation, which is now at 4.9%, is transitory. An outlook that shows consumer-price gains below 2% over the horizon might bolster that view.
Still, the strength of that argument might depend on how far under the goal inflation falls to in the projections. The closer it is to 2%, the easier it might be for hawkish policy makers to stress the threat of price pressures becoming entrenched.
According to one official, the outlook will show inflation only just under the target in both 2023 and 2024, and it doesn’t account for elements that could prove upside risks.
Such factors include the cost of owner-occupied housing — a new consideration since the ECB’s strategy review released in July — and a number of announced but not-yet implemented policies such as a 25% increase in Germany’s minimum wage, the official said.
(Updates with markets in fifth paragraph. A previous version corrected the September forecast in second paragraph)
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