Eurozone inflation will burn hotter, but ECB rates will remain on ice: Reuters poll Reuters

Author: Swathi Nair

BENGALURU (Reuters) – Eurozone inflation will be warmer than expected a month ago in 2022, according to economists surveyed by Reuters, which could put pressure on the European Central Bank to step up its policy after the Omicron wave of a hardening pandemic.

In the short term, the virus remains a wildcard, with numerous forecasts of economic growth in the survey from 11 to 18 January, and the average forecast for the current quarter has fallen from 0.5% to 0.7%.

More than two-thirds of economists surveyed said the Omicron variant will have a lighter economic impact than Delta, especially since there are fewer reductions now.

This year’s inflation forecast rose following the seventh survey, which rose by 0.6 percentage points in the first and second quarters of 4.1% and 3.7%, respectively, above the ECB’s 2.0% target.

“In the short term, we see some downside in the growth as a result of virus containment measures,” said Bas van Geffen, Rabobank’s senior macro strategist, referring to the current quarter.

“We expect slower growth, especially in the long run, as supply-side inflation erodes real household spending power, which leads to growth in consumption and eurozone GDP. Omicron or other strains could further exacerbate this negative impact of cost-driven inflation,” he said. . he said.

As in many other parts of the world, inflation is on the rise in the eurozone, but probably peaked in the last quarter.

The rise in annual consumer prices was a record 5% in the last month. But the ECB has maintained its call for tighter policy, saying it will ease price pressures this year.

So far, the results of the survey have confirmed that inflation will fall to 1.9%, below its target in the fourth quarter, and will fall below an average of 2.0% thereafter.

So almost all economists hoped that policy interest rates would remain steady next year.

“Monetary policy cannot do much with supply-side inflation shocks, such as supply chain shocks, energy shortages and global food prices: after all, ECB policy cannot create semiconductors or food,” said van Geffen of Rabobank.

Of the 39 economists who forecast the rate for 2023, those who see a rate hike were equally distributed in the first or second half of the year.

A similar analysis showed that slightly more analysts expect higher rates compared to the December survey in the first half of next year. One expects rates to rise this year.

This is in stark contrast to the US Federal Reserve. In the face of 40-year high inflation, as soon as March, its federal funds rate will rise to almost zero.

Some economists say the ECB should also move soon.

“Zero and negative interest rates, respectively, are pure emergency measures. As inflation is above target and inflation risks are skewed upwards, as well as the tight labor market and closed production gap, there is no reason to keep rates so low,” he said. Jörg Angelék. Senior Economist at Bantleon Bank.

“It would be better for the ECB to start reversing its monetary policy in small steps at the beginning of the return of the ultrasound. If it waits too long, it risks being forced to pull the brakes and end the recession.”

When asked when the ECB would end its asset purchase program, about 85% of respondents, 28 out of 33, said it was the end of the first half of 2023. The Fed has already suggested that it begin downloading the contents of its bonds soon.

The eurozone economy is expected to grow by 4.0% this year and 2.4% next, from 4.2% and 2.3% a month ago.

Growth in Germany, the largest economy, fell to 4.0% from 4.4% in the last quarter of October, according to the average forecast. Expected growth in France fell slightly to 3.7% from 3.9%, while the forecast for Italy remained at 4.2%.

The three largest economies in the bloc saw a significant rise in inflation forecasts this year.

This year’s Eurozone unemployment rate forecast fell slightly from 7.3% in the last survey to 7.2%, and the forecast for next year remained at 7.0%.

(For other Reuters global economic survey stories 🙂