MNI SOURCES: ECB To Revise 2025 Inflation Slightly Higher
MNI (LONDON) - The European Central Bank is likely to slightly revise up its inflation projections for 2025 in its March projections, reflecting a stronger-than-expected start to the year for energy prices, though this is seen as a temporary blip which may only push back reaching the 2% target by a few months, Eurosystem sources told MNI.
While the ECB is heading to cut the deposit rate by another 25 basis points to 2.5% at its meeting on March 5, the rate path beyond is more uncertain, with even dovish officials recognising some increase in upside inflation risks at the same time as output remains anaemic. The March cut is almost fully priced in by rates futures, but the timing of the additional 60 or so basis points in easing implied by December is less certain.
“What seems clear is that the risk to growth is still on the downside, but the inflation risks are balancing out,” said one official from one of the more traditionally dovish national central banks, “We are still in restrictive territory, and we will cut in March. After that, April and June seem to me to be a total unknown. The key word is uncertainty.”
Energy and services both constitute upside risks, together with U.S. trade policy, the source said, adding that eurozone inflation could experience persistent but minor deviations from the 2% target in months ahead. Another source said some inflation readings in the first half of 2025 could be pushed up by 0.1 percentage point, with January’s higher-than-expected data mechanically feeding through into a slightly higher projection. (See MNI SOURCES: ECB Likely To Tweak Language, Keep "Restrictive")
Still, a cut in April remains more likely than a pause that month, said another source, stressing that the modest bump in inflation will prove temporary and does not affect concerns about undershooting the target in 2026 and 2027. Other sources also disagreed about the direction of risks from services, which they said could even tilt to the downside.
TARIFF SCENARIOS
Uncertainty, which one official saw persisting at elevated levels for the next two to three months at least, is also holding back consumption and investment, further delaying what the ECB continues to expect to be an economic recovery, sources said. The ECB has modelled the impact of U.S. tariffs, but is unlikely to publish potential scenarios in upcoming projections due to the sensitivity of the topic.
“There are effects going in both directions,” one official said in reference to the inflationary impact of tariffs,” On balance, it's rather to the upside than to the downside. But it's not a huge thing, I would say.”
The potentially dramatic changes in the eurozone’s fiscal environment, as the European Commission considers allowing national escape clauses to its rules on government borrowing in order to allow member states to spend more on defence, are not significantly affecting ECB calculations for the time being.
"There are far too many moving pieces and variables for it to be part of the policy framework now … and in all honesty, the current size increase of spending is of the magnitude there is always the hope that the increased cost for defence is quite quickly brought within the current fiscal space,” one source said.
NEUTRAL DEBATE
With the Deposit Rate having been lowered since June last year from a tightening cycle peak of 4%, some, such as Executive Board Member Isabel Schnabel, think neutral may already have been reached, though this is very much a minority view. A recent staff estimate slightly adjusted its estimated range for the metric down to 1.75% to 2.25%.
Hawkish officials are already pushing to remove a reference to policy being at restrictive levels from the ECB’s statement, though dovish resistance could limit the change to a mention of the need to closely monitor the degree of restriction. At the same time, Eurosystem officials downplay the importance of neutral estimates, arguing that the concept remains too imprecise to dictate future policy moves. (See MNI INTERVIEW: Neutral Not Key To ECB Policy - Patsalides)
“It will be one of many factors considered. But its weight in discussions depends on the broader situation and the volatility of other indicators,” one official said.
Executive Board members Luis de Guindos and Schnabel have pointed to the ECB’s Bank lending survey, next published just ahead of the April policy meeting, as an essential early indicator, though other officials emphasised that this will be but one of many data sources to be considered.
An ECB spokesperson declined to comment.