According to estimates by financial market experts, the inflation rate in the euro zone will probably be years above the European Central Bank’s target. However, the inflation expectations of the experts are falling noticeably for the first time in a long time, as a survey by the Mannheim-based economic research institute ZEW shows.
Frank Brückbauer, scientist in the ZEW research department Old-Age Provision and Sustainable Financial Markets, spoke of a trend reversal. “After no further increase in the inflation expectations of the financial market experts was recorded for the first time in May 2023, they are now falling noticeably for the first time in August 2023.” But inflation expectations remained high, he said. Inflation rates in the euro zone are likely to remain well above the ECB’s two percent target until at least 2025.
According to the survey, the financial market experts expect average inflation rates of 5.5 percent, 3.3 percent and 2.5 percent for the years 2023, 2024 and 2025. In May, the experts were expecting higher rates of 5.8 percent and 3.7 percent Percent assumed this year and next. 125 financial professionals took part in the ZEW survey.
Inflation had risen as a result of the Ukraine war
With their estimates, they are somewhat more pessimistic than the ECB, which expects an average inflation rate of 5.4 percent this year. Brückbauer said rising wages in the euro area remained an important driver of inflation. On the other hand, the weak economy is having a dampening effect.
Inflation in the euro zone had skyrocketed, in particular due to higher energy and food prices in the wake of the Ukraine war. After years of zero and negative interest rates, the ECB has responded with an unprecedented series of nine rate hikes so far.
The key interest rate at which commercial banks can get fresh central bank money is 4.25 percent. Higher interest rates make loans more expensive, which can curb demand and curb high inflation rates. Inflation in the euro zone is falling: in June it was 5.5 percent after 6.1 percent in May. However, the rate is still more than twice as high as the ECB’s medium-term inflation target of two percent, at which it sees price stability. ECB President Christine Lagarde is determined in the fight against inflation. With a view to the next meeting of the ECB Council in September, however, she did not rule out an interest rate pause for the first time.
