Euro zone consumers have significantly raised their inflation expectations, and banks have simultaneously tightened access to credit, according to polls released on Tuesday. These developments illustrate the early impact of surging energy costs, exacerbated by the recent Iran conflict. This dual pressure places the European Central Bank (ECB) in a difficult position, as rising inflation concerns typically call for interest rate hikes, while worsening financing conditions argue against such moves.
The ECB’s Consumer Expectations Survey showed inflation expectations for one year ahead jumped to 4.0% in March from 2.5% a month earlier. Similarly, bets for three years out rose to 3.0% from 2.5%, both well above the central bank’s 2% target. The European Central Bank is the central bank of the 20 Eurozone countries. Its primary mandate is to maintain price stability, targeting inflation at 2% over the medium term. Policymakers may find minor comfort in consumers’ longer-term expectations, which only nudged from 2.3% to 2.4% for five years ahead.
Concurrently, the central bank’s quarterly Bank Lending Survey indicated lenders tightened loan approval criteria more than anticipated in the three months to March. This trend is expected to persist this quarter, with banks effectively doing “some of the ECB’s work” by making credit harder to obtain, particularly for firms, which saw the sharpest tightening since the third quarter of 2023. Perceived risks, reduced bank risk tolerance, and geopolitical and energy developments were cited as main factors.
ECB policymakers are widely expected to keep interest rates on hold when they meet on Thursday, awaiting further evidence regarding the duration and extent of the energy-induced inflation shock. However, rate hikes are anticipated to be firmly on the table by their next decision in June. Broader surveys last week highlighted that the global economy, and especially the euro area, is grappling with tangible strains from the energy shock triggered by the Iran conflict, impacting manufacturing costs and weakening activity across sectors.
