ECB: Case for policy normalisation gets stronger

In Short

Following a decade of fight against low inflation, the post-pandemic recovery, high energy prices and persisting bottlenecks pushed inflation strongly above target in 2021. Euro area inflation shot up to 5.0% yoy in December and for most of 2022 it is set to stay clearly above target.


  • The pandemic’s grip on euro area activity is weakening while headline inflation will remain well above target for most of 2022 due to high energy prices and persisting supply bottlenecks. In contrast, underlying inflation is set to fall below the 2% threshold again and to stay there.
  • Looking beyond 2022, with inflation expectations now broadly at target there is mounting indication that the low inflation environment of the past decade is over. The green and demographic transition are key factors implying higher underlying price pressure and then significantly less need for policy support.
  • The ECB will need to withdraw stimulus after the PEPP’s end in 2022 while not jeopardizing the recovery by keeping financing conditions still favourable. It already announced a smooth reduction of QE over 2022. Therefore, due to the new strategy, near-term downside risks (e.g. pandemic, China, geopolitics) and because of credibility reasons we continue to deem a 2022 rate rise very unlikely.
  • That said, Governing Council (GC) members see the inflation risks tilted to the upside. We now expect that higher energy prices and second-round effects in the 2022 wage negotiations trigger a first 20 bps rate hike already in June 2023.

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ECB: Case for policy normalisation gets stronger

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