Economists expect the ECB to forecast inflation rising to 2.5% by the end of the year. Core inflation is just below 3% and services inflation, which has not fallen for the year, is running above 4%, prompting hawks to call for more easing.
The ECB’s upcoming projections are expected to reflect a downward revision to growth expectations for the second quarter and a slight upward adjustment to core inflation for the current year. However, the longer-term outlook is expected to remain unchanged, with inflation expected to return to 2% by late 2025.
The strengthening of the euro against the dollar, reaching $1.12015 in late August and a record high on a trade-loaded basis, is seen as having marginal effects on inflation. ECB research shows that only more obviously and consistently exchange rate movements will significantly affect inflation rates.
The new ECB interest rate framework, which was introduced in March, will be applied for the first time on Thursday. It includes a reduction in the discount for banks’ borrowing from the ECB’s weekly cash auctions from 50 basis points to 15 basis points relative to the ECB’s deposit rate.
This adjustment is part of a strategy to manage money market stability and encourage interbank lending. However, with a lot of liquidity of around €3 trillion and minimal borrowing from the ECB’s latest auction, the impact of this change is expected to become apparent over a few years.
Market participants are also awaiting details of the ECB’s plans for longer-term loans and bond-buying operations, which will become even more valuable as the ECB’s balance sheet begins to expand again.
