Euro zone consumers have slightly lowered their short-term inflation expectations but remain pessimistic about economic growth, according to the latest European Central Bank (ECB) survey released on Friday.
The ECB’s Consumer Expectations Survey revealed that median inflation expectations for the next 12 months declined to 2.6% in January, down from 2.8% in December. However, longer-term expectations remained unchanged at 2.4%, still above the central bank’s 2% target.
Despite easing inflation concerns, consumers also reduced their nominal income growth expectations to 0.9% from 1.1%. This suggests that households anticipate a decline in their inflation-adjusted earnings, which could weigh on overall economic activity.
Potential for ECB Rate Cuts
The survey results reinforce the case for further interest rate cuts by the ECB. A rate cut at the upcoming March 7 meeting is widely expected, with the focus now shifting to how many more reductions will follow in the coming months. Current market expectations suggest at least two or three additional cuts, with investor sentiment fluctuating in response to trade policy developments in the United States.
Concerns Over Economic Contraction
While consumer sentiment on growth showed a slight improvement, households still foresee the euro zone economy shrinking by 1.1% over the next year. This marks a marginal improvement from the 1.3% contraction predicted in December but remains a sign of continued economic uncertainty.
The ECB has been carefully monitoring inflation and economic growth indicators as it navigates its monetary policy strategy. With inflation expectations moderating but still above target and consumers anticipating further economic contraction, policymakers face a delicate balance in deciding the pace and extent of rate cuts.
As global economic conditions, particularly trade policies from Washington, continue to influence market expectations, the ECB’s next moves will be closely watched by investors and policymakers alike.
