Compared to the key points we identified prior to the ECB’s 10 March meeting, what was the actual outcome? Concerning the new inflation forecast to begin with, the upward revision, compared to the December 2021 scenario, was effectively big, at least for 2022. Indeed, the ECB now expects an inflation rate of 5.1% this year, in average annual terms. Inflation would remain slightly above the 2% target in 2023 and would decline slightly below it in 2024.
If inflation in 2022 is expected to be very high, the persistence of the inflationary tensions currently at work appears limited the following years. At the same time, the ECB seems more confident to reach its inflation target. The conditions seem closer to come together, at least on paper, for the ECB to begin raising its key rates. This does not answer, however, the question of “when?” What would be the right moment to start hiking rates, especially given the concomitant worsening of the economic outlook due to the launch of Russia’s military invasion against Ukraine on 24 February.
Concerning the new growth projections, the ECB lowered, by half a point, its forecast for 2022. The downward revision to 2023 was minimal and the ECB left unchanged its growth forecast for 2024. These revisions include the negative impact on growth of pricing pressures that existed prior to the war, as well as the preliminary estimates of the negative impact of the war itself. But the positive economic momentum that prevailed before the conflict is, on the contrary, supportive.
We find that these forecasts do not reflect the current emerging fears of a stagflation scenario, as in the seventies. We have to keep in mind that stagflation is a multi-year phenomenon combining high inflation and high unemployment. We are not there yet. Besides, fiscal support measures are expected to buffer the shock, which also helps accelerate a series of investments which are growth supportive.
The war in Ukraine have made us enter an environment of radical uncertainty. But it certainly further complicates the ECB’s task, which has to strike a balance between fighting inflationary risks and supporting growth. In the press release, the ECB starts by reminding that it will take whatever action is necessary to ensure price and financial stability in the euro area. However, inflation fears seem to dominate over growth concerns.
In particular, the ECB announced a faster APP tapering, with monthly net purchases amounting to 40 billion euros in April, 30 in May and 20 in June. The calibration in Q3 will be data-dependent and the APP could even be concluded then if the inflation outlook does not weaken as expected.
