At the same time, the recent surge in bond yields could do what the policy rate hikes have not entirely achieved, yet - bringing down the demand side of the eurozone economy. Needless to say, any further escalation of the situation in Israel and the Middle-East, plus chances that terror could also reach Europe, would weigh on sentiment and growth. As a result, the return to 2% would be delayed to 2026. If oil prices were to average $95/bbl next year, this would probably push up the ECB’s inflation forecasts to 3.3% for 2024 (from 3.2%) and more importantly to 2.4% in 2025 (from 2.1%). The ECB’s September staff projections were based on the technical assumption of an average oil price of $82/bbl in 2024. While the surge in oil prices will put new upward pressure on inflation and could make reaching the 2% target at the end of 2025 more unlikely, the conflict in Israel and the Middle East as well as the rally in bond yields will further dampen eurozone growth prospects. Recent developments have put the ECB in an even more difficult positionĪs much as the ECB has tried to keep the door to further rate hikes open since the September decision, recent developments have clearly complicated its position. As “a range of model-based simulations suggested that a deposit facility rate in the region of 3.75% to 4.00%, so long as it was understood as being maintained for a sufficiently long duration, should be consistent with a return of inflation to target within the projection horizon.” The September rate hike could have been the last one.Adverse weather conditions, and the unfolding climate crisis more broadly, could push food prices up by more than expected.” “…members assessed that there were still upside risks to inflation due to potential renewed upward pressures on the costs of energy and food. If anything, risks to inflation are still to the upside.“It was widely felt that, with hindsight, the June projections had been too optimistic about the strength of the economic recovery in 2023…Looking ahead, optimism about a rebound in private consumption embodied in the baseline beyond 2023 might be questioned, given a prolonged deceleration in annual credit growth.” The ECB has become more concerned about growth.“A solid majority of members expressed support for the 25 basis point rate hike.” The debate was indeed more heated than before, with views on inflation and the policy rate diverging more and some members having been in favour of a pause. Below are the most relevant parts from the just released minutes.
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