ECB Forecasts Inflation to Drop Below 2% Target by 2025

This forecast comes a day after the ECB’s decision to cut interest rates by 25 basis points for the third time this year.

ECB officials suggest that the 2% inflation target could be achieved as early as the first or second quarter of 2025, significantly earlier than previous estimates.

This opens the door for further monetary easing. In September, headline inflation already dipped below the ECB’s target, falling to 1.8%.

The bank expects inflation to rise in the coming months before declining towards the 2% target next year.

Domestic inflation remains high due to continued wage growth. For the core inflation index, which excludes energy, food, alcohol, and tobacco, analysts predict a decrease from 2.8% in 2024 to 2.2% in 2025 and 2% in 2026.

Consumer prices are estimated to be at 1.9% in 2025, below the previous 2% forecast. Predictions for 2024 and 2026 remain unchanged at 2.4% and 1.9%, respectively.

The ECB’s decision to cut rates, which was unexpected in recent weeks, comes as data shows the eurozone economy in a worse state than when policymakers last met.

A separate ECB survey found that non-financial companies reported “further restraint in overall price increases” and continued to expect gradual easing of wage increases next year.

Employment prospects were deemed subdued, with parts of the manufacturing sector restructuring in response to weak demand and/or rising wage costs.

The interest rate cuts in June and September had a negative impact on banks’ net interest income for the first time since late 2022.

Banks expect this negative impact on profit margins to intensify and lead to a decrease in overall profitability from the high levels achieved during the 2022-2023 tightening cycle.

Regarding lending conditions, the ECB’s October 2024 euro area bank lending survey showed that criteria for business loans remained unchanged in the third quarter of 2024, after more than two years of tightening.

For households, criteria eased for mortgage loans but tightened for consumer loans.

For the first time since the third quarter of 2022, banks reported a modest net increase in loan demand from businesses, though it remains generally weak.

Net demand for housing loans recovered strongly, while demand for consumer credit and other household loans increased more modestly.

The interest rate reduction drove loan demand from businesses, while fixed investments had a modest effect.

For housing loans, the net increase in demand was mainly due to lower interest rates and improved housing market prospects, while consumer confidence and spending on durable goods supported demand for consumer credit.

Source: In-Cyprus