Eurozone inflation expectations edge up for 2024

The ECB has kept interest rates at a record high since last September and consistently pushes back on rate cut talk.

European consumers expect inflation to rise over the next year, according to a new European Central Bank survey.

Median expectations for inflation over the next 12 months edged up to 3.3% in January from 3.2% in December, while those for inflation three years ahead remained unchanged at 2.5%.

The survey of 19,000 adults across 11 countries, including Ireland, found expectations of income growth over the coming year remained unchanged, at 1.2%. 

Inflation across the eurozone has fallen significantly in recent months and now stands just below 3%. 

However, the ECB has remained cautious and guarded in its language related to any possible cuts in interest rates. They have repeatedly stated rate cuts will not come into effect until inflation comes close to its 2% target, which could take another year.

German Bundesbank president Joachim Nagel said inflation remained stubbornly high and the ECB should resist the temptation to cut interest rates early, especially before crucial wage data in the second quarter.

The ECB has kept interest rates at a record high since last September and consistently pushes back on rate cut talk, arguing wage growth is still too quick for it to sound the all-clear and start unwinding restrictive policy.

"Even though it may be very tempting, it is too early to cut interest rates," Nagel said in a speech.

We will only receive a more detailed picture of how domestic price pressures are unfolding during the second quarter. Then we can contemplate a cut in interest rates.

Isabel Schnabel, the other German on the 26-member governing council and another influential voice, was also cautious in her assessment on Friday, arguing the final phase of getting inflation under control may be more difficult than some anticipate.

"We need to be cautious... there are reasons for the last mile to actually be more difficult than the first phase," she told a university lecture in Milan.

She also argued that, with markets already anticipating rate cuts, financial conditions had already loosened substantially, unwinding some of the ECB's efforts and adding to the need for caution.

Market bets on rate cuts have been extremely volatile in recent weeks.

Investors were betting on 150 basis points of easing in 2024 just a few weeks ago, but expectations have receded and now stand at just 88 basis points, with the first move seen in June.

ECB president Christine Lagarde said this week new data on wage numbers was encouraging but the ECB will require additional data to be convinced inflation will not flare up again.

"The fourth-quarter wage numbers are obviously encouraging numbers,” she told reporters in Ghent, Belgium, on Friday. 

“The governing council needs to be more confident the disinflation process that we are observing will be sustainable and will take us to the 2% medium term target.” 

Negotiated euro-area pay data published this week showed fourth-quarter pay growth slowed to 4.5% — soothing concerns rising salaries could sustain inflation above the ECB’s target.

• Additional reporting Bloomberg and Reuters