Economic expectations raised
ECB expects higher inflation than before
06.06.2024, 17:08
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Four times a year, the ECB’s economists give their assessments of inflation and the economy. They now expect inflation to fall more slowly than initially assumed. However, the European economy is likely to prove more robust.
Despite the first interest rate cut in years, the European Central Bank has raised its forecast for inflation. While the central bank economists were still expecting an increase of 2.3 percent this year in March, they now expect an inflation rate of 2.5 percent in the common currency area, as the ECB announced in Frankfurt. For next year, the economists now expect 2.2 percent, 0.2 points more than three months ago. Meanwhile, they left their forecast for 2026 unchanged at 1.9 percent. This would put the ECB on track to achieve its inflation target of two percent, which it considers to be the optimal level for the 20-country community.
The inflation rate in the 20-country community rose to 2.6 percent in May from 2.4 percent in April. This means that the rate has moved further away from the ECB target of 2.0 percent. The much-watched core rate, which excludes volatile prices, also rose to 2.9 percent in May from 2.7 percent in April. The inflation rate will probably remain above the European Central Bank’s target until next year, said ECB President Christine Lagarde after the interest rate decision.
The monetary authorities have lowered interest rates for the first time in years. The deposit rate that is crucial on the financial market and which banks receive when they park surplus funds with the central bank has been reduced from 4.00 percent to 3.75 percent.
According to ECB President Lagarde, the economy in the eurozone will continue to recover. Higher wages should contribute to this, she said. The export sector should also contribute to positive economic development in the coming quarters as global demand increases.
The central bank economists expect economic growth in the eurozone of 0.9 percent for the current year. In March they had only expected 0.6 percent. For 2025 they then expect gross domestic product (GDP) to increase by 1.4 percent (March forecast: 1.5 percent), and for 2026 they continue to expect growth of 1.6 percent. The eurozone economy returned to growth in the first quarter with GDP growth of 0.3 percent and ended its recession.
The central bank economists prepare economic and inflation forecasts for the euro area four times a year. These projections are presented to the monetary authorities for their discussions at the interest rate meetings in March, June, September and December.