Eurozone consumer one-year inflation expectations cool down to 3.5%

Eurozone consumer one-year inflation expectations cool down to 3.5% - ECB survey shows

Major findings of survey

Inflation expectations for the one-year ahead dropped to 3.5% in May from 4.0% in April.
Consumers are less pessimistic about the GDP growth outlook.
Three- and five-year inflation expectations remain unchanged at 2.9% and 2.4% respectively.

A drop in near-term Eurozone inflation expectations will likely discourage ECB policymakers from tightening monetary conditions quickly. In the monetary policy announcement this month, the ECB raised policy rates by 25 basis points (bps).

Following the ECB policy announcement, board members also signaled that the central bank needs to do more for inflation to return to the 2% target. “From today’s perspective, we will need to raise interest rates further in order to bring inflation back to our two percent target over the medium term,” ECB policymaker Isabel Schnabel said, remarks reported by Econostream on Thursday.

ECB FAQs

What is the ECB and how does it influence the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.