Eurozone consumers have raised inflation expectations significantly, and banks have simultaneously tightened access to credit, according to polls released on Tuesday. These developments reflect the early effects of rising energy prices, exacerbated by the recent Iran conflict. These dual pressures put the European Central Bank (ECB) in a difficult position, as rising inflation typically calls for interest rate hikes, while worsening financial conditions argue against such measures.
The ECB’s survey of consumer expectations showed that inflation expectations for one year rose to 4.0% in March from 2.5% a month earlier. Similarly, three-year rates rose from 2.5% to 3.0%, both well above the central bank’s 2% target. The European Central Bank is the central bank of the 20 Eurozone countries. Its primary mandate is to maintain price stability, targeting inflation at 2% over the medium term. Policymakers may find modest comfort in long-term consumer expectations, which edged up to just 2.3% to 2.4% for the next five years.
Also, the central bank’s quarterly bank lending survey indicated that lenders tightened loan approval criteria more than expected in the three months to March. The trend is expected to continue this quarter, with banks effectively doing “some of the ECB’s work” by making it harder to get credit, particularly for firms, which saw the most tightening since the third quarter of 2023. Perceived risks, declining bank risk tolerance, and geopolitical and energy factors were key factors.
ECB policymakers are widely expected to keep interest rates on hold when they meet on Thursday, pending further evidence on the duration and extent of the energy-induced inflation shock. However, their next decision in June is expected to put a rate hike firmly on the table. The broader survey last week highlighted that the global economy, and the euro area in particular, is under significant stress from the energy shocks stemming from the Iran conflict, which is affecting manufacturing costs and weakening activity across sectors.
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