The European Central Bank announced new economic forecasts at yesterday’s meeting, predicting slower economic growth in 2023 and 2024 and higher inflation compared to the forecasts made in June. Specifically, the GDP growth forecast for next year has been significantly revised downward, and the ECB expects economic stagnation in the winter of 2022/23.
Therefore, real GDP growth in the euro area is expected to be 3.1 percent year-on-year in 2022, 0.9 percent in 2023, and 1.9 percent in 2024. At the same time, inflation estimates have been revised upward. Thus, the average annual inflation has been revised to 8.1 percent in 2022 (from 6.8 percent), 5.5 percent in 2023 (from 3.5 percent), and 2.3 percent in 2024 (from 2.1 percent).
We believe that the ECB’s new inflation forecasts for 2023 (below 6 percent) are overly optimistic, while in 2024 we expect an average annual increase in consumer prices of at least three percent.
On the other side of the Atlantic, claims for unemployment benefits continued their downward trend for the fourth consecutive week, signaling continued strong demand for labor despite the economic slowdown. Specifically, there was a decrease of six thousand claims, to 222 thousand, which is the lowest level since May.
On the other hand, total claims rose by 36 thousand, to a total of 1.47 million, which is the highest level since April. However, the continuation of below-average levels suggests a relatively quick finding of employment for unemployed individuals. Nevertheless, strong hiring may continue to slow due to aggressive interest rate hikes by the Fed, while on the other hand, certain sectors facing labor shortages are not inclined to lay off workers.
Continuation of Interest Rate Increases
Let us recall that the ECB’s governing council decided at yesterday’s meeting to increase three key interest rates by 75 basis points. Accordingly, the interest rate on main refinancing operations will be 1.25 percent, the interest rate on the standing lending facility from the central bank will be 1.50 percent, and the interest rate on the standing deposit facility with the central bank will be 0.75 percent.
The increases will take effect on September 14, 2022. The governing council, according to its current assessment, expects to continue raising interest rates at the next few meetings to mitigate the risk of a persistent rise in inflation expectations. In doing so, the direction of monetary policy will be regularly reassessed in light of new information and inflation prospects. Decisions on key interest rates will continue to be made based on recent data and at each individual meeting.
It has been emphasized that inflation remains excessively high and is likely to stay above the target level (the ECB’s medium-term target of two percent) for a longer period.
The governing council intends to continue fully reinvesting the principal of maturing securities purchased under the APP and after it begins to raise key interest rates, for as long as necessary to maintain conditions of ample liquidity and appropriate monetary policy. Regarding the PEPP, the governing council intends to reinvest the principal of maturing securities purchased under that program at least until the end of 2024.
