- Consumer inflation expectations for the next 12 months and three years remained unchanged
- The increased volatility in interest rate markets was primarily caused by uncertainty about the future path of inflation
- High energy prices are reducing people’s purchasing power in the Eurozone. Furthermore, the negative geopolitical situation, particularly the Russia-Ukraine conflict, is weighing on business and consumer confidence
In comparison to July, consumer inflation expectations for the next 12 months and three years remained unchanged.
Earlier in September, the European Central Bank’s Governing Council decided to raise the three key ECB interest rates by 75 basis points. With effect from September 14, 2022, the interest rates on the main refinancing operations, the marginal lending facility, and the deposit facility have been raised to 1.25%, 1.50%, and 0.75%, respectively.
Inflation expectations remained below perceived past inflation rate, particularly over a three-year horizon. The median inflation expectation for the next 12 months and the median inflation expectation for the next three years remained unchanged at 5.0% and 3.0%, respectively. The median rate of perceived inflation over the previous 12 months has now risen to 8.0%, up from 7.9% in July.
Consumers anticipated a 1.0% increase in income over the next 12 months, up from 0.8% in July. Except for a few exceptions, the increase in expected nominal income growth was broad-based across income groups. Perceptions of nominal spending growth over the previous year have risen to a new high of 5.8%, up from 5.4% in July.
Higher-income respondents saw the greatest increases. Economic growth forecasts for the next 12 months have risen slightly from -1.9% in July to -1.7%. Following a decline in July, consumers raised their expectations for home price growth over the next 12 months to 3.4%. Mortgage interest rate expectations for the next 12 months have risen to 4.4%, 1.1 percentage points higher than at the start of 2022.
Earlier in September, members of the Monetary Policy Committee met in Frankfurt and stated that investors had gradually shifted back toward a tighter monetary policy stance as inflation outcomes continued to be higher than expected. The increased volatility in interest rate markets was primarily caused by uncertainty about the future path of inflation and the shift in monetary policy to a meeting-by-meeting approach, which increased data dependency.
With the latest increase in front-end inflation swap rates, real short-term rates in the eurozone were expected to remain highly accommodative for some time. Monetary policy expectations had been reassessed, which had been transmitted to broader financial markets.
High European energy prices and rising downside risks to growth in the eurozone relative to the US were also weighing on the euro exchange rate. Eurozone sovereign spreads had gradually widened as policy rate expectations shifted.
Financing conditions had continued to tighten, and the impact was spreading throughout the economy. Bond funding costs for banks had risen significantly for both covered bonds and senior unsecured bonds. Furthermore, deposit rates for firms and households had begun to rise. Both the nominal cost of firm debt financing and the nominal cost of household borrowing were expected to rise further later in the year.
High energy prices are reducing people’s purchasing power in the Eurozone. Despite easing, supply chain bottlenecks continue to limit economic activity. Furthermore, the negative geopolitical situation, particularly the Russia-Ukraine conflict, is weighing on business and consumer confidence.
Galactik Views