ECB might get it wrong again
The de-escalation of eurozone inflation, which fell to 9.2% in December, is not expected to convince the European Central Bank to ease its aggressiveness in interest rate hikes, at least for now, analysts note to Kathimerini, a mistake in policy and also its predictions – which have often proven wrong – not ruled out, as it risks acting excessively in its struggle to tame high prices.
As Jan Von Gerich, chief analyst at Nordea Research, notes, it is not yet clear whether recent developments have eased the pressure on the ECB. “ Sure, market energy prices have fallen and headline inflation surprised to the downside. But the core pressures are more important for the ECB, and the core inflation number surprised to the upside. And also economic data have been quite resilient in the euro area. One also needs to keep in mind that if the ECB thinks that tighter financing conditions are required to tame inflation, then falling market rates actually increase pressure on the ECB to do more, not reduce it.” he points out.
“My baseline is that we will see at least two more 50 basis-point rate hikes. Beyond that, they could reduce to pace to 25bp or even stop, but there are still a lot of uncertainties. The Fed could easily stop before the ECB. There is certainly the possibility that the ECB is now overestimating inflation, but inflation could easily prove to be sticky, which is a notable risk especially in the Euro area, where the economy is not as dynamic as in the US, and remain above the ECB’s target for much longer. The inflation environment has changed dramatically and if somebody is saying they know for sure where rates will peak and where inflation will settle, they are not telling the truth,” according to the Nordea economist.
“At this stage I would still think there is more of a chance for the ECB to do more than we expect than less. The council continues to sound fairly hawkish and there have already been some council members pivoting to a focus on core inflation. And core inflation is likely to remain sticky. Alongside the resilient labor market the ECB may continue to worry that second round effects from wages to core inflation may materialize, says Oxford Economist analyst Oliver Rakau.
“I think essentially the ECB may remain in the risk management mode for longer than strictly necessary. So indeed, we see chances of the ECB overtightening, which will weigh on growth later this year as for instance the construction demand will be weighed down. Much will depend on core inflation and wage data in the coming months. The ECB is probably very conscious of the overtightening risk but currently still deems the risks of second round effects and sticky core inflation as larger,” Rakau argues.
ING chief economist Carsten Brzeski adds that “there is a risk that the ECB has it wrong again. If energy prices remain at their current levels, headline inflation could even temporarily touch 2% this year.”
He says “we will lower our own inflation forecast to around 5.5% later this month and this is still based on energy price assumptions similar to what the ECB had in December. If energy prices remain at their current levels, inflation could come in at around 4% on average in 2023.”
“For the ECB, this complicates things a lot. All fiscal stimulus measures cushioned the downswing but also run the risk of entending inflationary pressure. Similar to what we had in the US with the Covid payments. This is why the ECB will at least do the hike in February. March will be trickier as this is the meeting with new staff projections. If energy prices remain as they are, the ECB will have to revise downwards its inflation projections. High core inflation and the fear of stopping to early will probably push the ECB to do an additional 50 basis-point hike in March. The final 25bp hike, however, is more than uncertain. I could very well see the ECB pausing after the March meeting,” states Brzeski.
