ECB Says Consumer Inflation Expectations Fall Significantly

(Bloomberg) — Consumer expectations for euro-zone inflation receded “significantly,” according to the European Central Bank, bolstering calls for the pace of interest-rate increases to be slowed.

Expectations for three years ahead plunged to 2.5% in January from 3% in December, the ECB said Tuesday in its monthly survey. There was a decline over the next 12 months too — to 4.9% from 5%.

The pullback comes just over a week before policymakers are due to set borrowing costs, with a half-point hike in the deposit rate to 3% all but guaranteed. The data follow a worse-than-expected reading last week for core inflation, which hit a record and emboldened hawks advocating prolonged monetary tightening.

German bonds advanced Tuesday after the ECB’s release, lowering the 10-year yield as much as 11 basis points to 2.64%. Money markets, meanwhile, eased rate-hike wagers, pricing a peak of about 4.06% by October compared with as much as 4.09% on Monday.

The drop in expectations for inflation in three years was most pronounced in Germany, where consumers now reckon price growth will slow to the ECB’s 2% target. In the Netherlands, they only eased to 3%.

With next week’s rate increase almost certain, ECB officials have started to stake out positions on what should come after.

Chief Economist Philip Lane cautioned Monday against policy being on “autopilot,” while Portuguese central-bank chief Mario Centeno said inflation is undershooting forecasts. Austrian Governing Council member Robert Holzmann, by contrast, speculated that next week’s move will be followed by another three 50 basis-point increments.

The ECB survey also showed:

Economic-growth expectations for the next 12 months continued to shift upwards, to -1.2% from -1.5% in December
Unemployment seen at 11.6% vs. 11.9%

–With assistance from James Hirai.

(Updates with country-level data in fifth paragraph.)

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