ECB raises inflation, cuts growth forecasts

Reading Time: 3 minutes

FRANKFURT, June 9 (Reuters) – The European Central Bank raised its inflation projections once again on Thursday but cut its growth outlook as the conflict in Ukraine continues to weigh on confidence, consumption and investment.

The ECB now sees inflation over its 2% target throughout its projection horizon, accepting that rapid price growth is not nearly as temporary as it had forecast for the past year.

The ECB failed to predict the recent inflation surge and its projections have been raised sharply quarter after quarter, leading to criticism of the bank’s forecasting methods and a large internal study on how they got the outlook so wrong.

Inflation is seen averaging 6.8% this year, well above the 5.1% predicted in March, while it is seen at 3.5% in 2023 and 2.1% in 2024.

Inflation rose over 8% last month and could peak in the third quarter before a slow retreat.

Sky-high energy prices are the key reason for the inflation surge but food prices are also rising quickly and underlying price growth, which filters out volatile food and fuel prices, is also well above 2% now.

Expensive food and energy will be a drag on growth, holding back an economy which had just recovered from a deep, pandemic-induced recession.

The euro firmed and money markets moved to price more interest rate rises after the European Central Bank on Thursday signalled a string of interest rate hikes from July and a determination to tame stubbornly high inflation.

German 10-year bond yields rose to the highest since July 2014 at 1.43% after the ECB said, as expected, it was ending bond-buying stimulus and flagged a rate rise in July. The bond had traded around 1.37% earlier.

Money markets raised their bets on ECB rate hikes and now see 140 basis points in tightening by year-end, including 75 bps by September.

The euro lost ground in a knee-jerk reaction immediately after the statement but then recovered and traded 0.15% higher around $1.07335 by 1200 GMT.

Against the pound too it slipped 0.13% at 85.34 pence before rising to 85.55 pence .

Euro zone shares spiked higher immediately after the ECB statement before reversing the move. The euro STOXX index was last down 0.8%, still above its earlier session low. Euro zone banks ticked lower and were last down 0.1%.

“The ‘sustained’ and ‘gradual’ language suggest they see more hikes in 2023 than is currently priced in by OIS,” said Arne Petimezas, a senior analyst at AFS Group in Amsterdam, referring to the language used in the ECB statement.

Once you're here...