ECB to keep monetary policy highly expansionary if forecast inflation remains below 2%

It is reasonable to think that inflation in the eurozone will fall back below the ECB’s 2% target from mid-2022. This is also what the European Central Bank (ECB) expects. According to analysts at Natixis, as long as inflation is not a real threat in the eurozone, the ECB will keep its monetary policy highly expansionary.

The importance of the inflation forecast for 2023

“The ECB has many objectives: Help ensure public debt sustainability; Boost private and public investment, especially in the energy transition; Reduce structural unemployment. These objectives can be pursued as long as expected inflation remains below 2%. As is the case today, the ECB will continue to buy bonds without raising its key interest rates.”

“If expected inflation rose persistently and significantly above 2% (the ECB can tolerate inflation temporarily slightly higher than 2%, such as 2.5%, but not permanently), the ECB would likely do a policy about-turn and, like the Federal Reserve, exit quantitative easing and start planning interest rate hikes.”

“Inflation is forecast to be lower than 2% in 2023. But it is important to watch out for any shock that could push up inflation in 2023: Social crisis and demands leading to faster wage growth, bearing in mind that wage earners’ purchasing power has fallen in 2021; Geopolitical crisis, for example between Europe and Russia, leading to a further sharp rise in European natural gas prices; A flare-up of the health crisis, causing bottlenecks to reappear, particularly in transport.”

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