It's a question on many minds, isn't it? When will the economic tide turn, and when might we see a significant shift in how central banks are steering the ship? Looking at the recent pronouncements from institutions like the European Central Bank (ECB), the message is clear: we're still in a phase of tightening policy to combat stubbornly high inflation.
Back in December 2022, the Governing Council of the ECB made the decision to hike key interest rates by a substantial 50 basis points. And they signaled that this wasn't a one-off; they anticipate further increases. The reasoning? Inflation, as of November 2022, was still hovering around a concerning 10.0%, a far cry from the 2% medium-term target. While energy prices offered a slight reprieve, the cost of food and underlying price pressures across the economy have been strengthening and are expected to stick around for a while.
This isn't just about a quick fix. The ECB's strategy involves keeping interest rates at restrictive levels for a period. The idea is that this will gradually cool down demand, which in turn should help bring inflation back down and prevent expectations of persistently high prices from taking root. It’s a delicate balancing act, and their future decisions will be heavily influenced by incoming economic data, reviewed on a meeting-by-meeting basis.
Beyond interest rates, the ECB is also beginning to normalize its balance sheet. Starting from March 2023, they'll be letting their asset purchase programme (APP) portfolio shrink at a measured pace. This means they won't be reinvesting all the principal payments from maturing securities, leading to a reduction of about €15 billion per month on average until the end of the second quarter of 2023. The exact pace and details of this reduction will be announced in February 2023, and it will be regularly reassessed to ensure it aligns with their overall monetary policy goals and market stability.
So, when does this all 'start up again' in terms of easing? The current projections suggest a challenging near-term for the euro area economy, with a potential contraction in late 2022 and early 2023. Growth is expected to be subdued throughout 2023, though it's anticipated to pick up as the current headwinds fade. Inflation, while projected to decline markedly over 2023, is still expected to be above target for some time, averaging around 6.3% for the year before settling closer to 3.4% in 2024 and 2.3% in 2025. Inflation excluding energy and food is also projected to remain elevated in 2023 before gradually falling.
Globally, the economic outlook has also darkened, with slower growth anticipated for 2023. This paints a picture where the focus remains firmly on bringing inflation under control. Therefore, a significant shift towards easing monetary policy is unlikely until there's a sustained and convincing trend of inflation returning to target, coupled with a more stable economic growth outlook. It’s a waiting game, guided by data and a commitment to price stability.
