The ECB expects inflation to return to its 2% target in 2025

This Thursday, the ECB cut its average eurozone inflation forecast to 2% in 2025, bringing inflation next year in line with the central bank’s price stability target.

European Central Bank (ECB) President Christine Lagarde explained at a press conference after the Council meeting that the bank had revised down its forecast for average inflation in the eurozone to 2.3% in 2024 and 2.% in 2025, keeping it at 1.9% until 2026.

The average inflation forecast for 2024 was cut by four tenths, bringing it closer to the ECB’s target of 2% over the medium term, which is one of the factors the organization will consider in future decisions to reduce inflation.

Christine Lagarde emphasized that the inflation rate in January was 2.8% and, according to preliminary estimates from Eurostat, it is expected to slow down again to 2.6% in February.

“Inflation is expected to continue this downward trend in the coming months,” he said, adding that the institution expects the rate to move closer to its 2% target as labor costs moderate, as well as the effects of past energy shocks, bottlenecks in supplies and the economic crisis. The economic resumption after the pandemic is fading.

“Indicators of long-term inflation expectations remain generally stable, most of them around 2%,” he noted.

However, he stressed that there are risks, including rising geopolitical tensions, particularly in the Middle East, which could push up energy prices and transport costs in the short term and disrupt global trade.

Inflation could also be higher than expected if wages rise more than expected or if profitability proves more resilient, he said.

On the other hand, “inflation could fall sharply if monetary policy restricts demand more than expected or if economic conditions in the rest of the world unexpectedly deteriorate,” he noted.

According to the ECB President, risks to economic growth continue to decline.

“Growth could slow if the impact of monetary policy is stronger than expected. A weakening global economy or a new slowdown in global trade will also put pressure on growth in the eurozone,” he explained.

Christine Lagarde also stressed that the war in Ukraine and the conflict in the Middle East are “important” geopolitical risks that could lead to weakening trust among families and companies, which would affect global trade.

On the other hand, “growth could be higher if inflation falls faster than expected, rising real incomes mean spending increases more than expected, or if the global economy is growing faster than expected.”