Meanwhile, the central bank expects higher inflation and has downgraded its growth forecasts.
The European Central Bank (ECB) continued on its rate hike trajectory, lifting the deposit facility rate for the tenth consecutive meeting by 25 bps to now stand at 4%. Justifying this further move into ever more restrictive territory, the ECB upgraded its inflation forecasts for the next two years. It now sees inflation this year moving a tad higher to 5.6%, while next year has been raised 20 bps to 3.2%. It only expects inflation to moderate to its 2% target in 2025 (although it still will be just slightly above that at 2.1%). Forecasts for growth for the region however go the opposite way to inflation, with this year downgraded to a relatively stagnant 0.7% (from 0.9% at its last forecast). Next year sees a 50 bps downgrade to growth, now forecast to come in at 1%. This tepid growth with persistent higher than target inflation fits the classic definition of stagflation. What the ECB will hope for is that it is done with this hiking cycle amid the cooling growth. But that all depends on inflation and even if markets are currently optimistically pricing in cuts within a year, inflation needs to fall aggressively and/or growth falls further – neither of which the ECB sees happening anytime soon.
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