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As officials finish their pivot to address the danger of inflation spiraling out of control, this week will see the European Central Bank begin a new era in monetary policy. 

New forecasts are available and prices continue to rise at record rates. President Christine Lagarde, along with her team will close trillions worth of asset sales and pave the way for an end to eight years of negative interest rate.  

While consumer prices surging at more than four times the 2% goal are alarming enough, it’s the outlook beyond the immediate term that will underpin the shift. Their projections are likely to show inflation won’t drop below the target again through 2024.

Those new quarterly numbers will be the first to fully account for Russia’s war in Ukraine, which no matter when it ends will have lasting effects on energy and food costs. The new reality will show that the ECB’s criteria for rate liftoff are finally met — allowing it to join the Federal Reserve and its peers in hiking borrowing costs.

“With the forecast, they can show that their three conditions are fulfilled” to start removing stimulus, said Karsten Junius, an economist at Bank J Safra Sarasin in Zurich. “They can really close the old chapter and face the new threats.”

These challenges are starkly different from the pre-pandemic picture, in which officials fought sluggish growth of consumer prices that was well below their target. This situation is one that ECB researchers attribute to past crises and demographics as well as digitization.

It has been a dramatic turnaround. The rise in inflation is now at 8.8% due to high energy prices and logistic snarls. Even when those issues are overcome, the “disinflationary dynamics of the past decade are unlikely to return,” according to Lagarde.

Bloomberg polled economists to see the 2024 inflation projection at 2%. This is a significant increase from March’s level of 1%. That would satisfy the ECB’s requirement that price growth not only quickens for a brief period, but remains elevated over the medium term.

After net bond-buying has been ended, the result will be the first rate rise in over a decade. How much will it increase is still the topic of intense debate in the Governing Council. Some want a half point hike.

The majority of economists only see two quarter-point movements — September and next month. Bank of America (NYSE 🙂 changed its mind last week and predicted steps of twice that amount at both meetings.

Lagarde has portrayed Russia’s invasion as a pivotal moment that may prove to be a “tipping point for hyper-globalization,” while speeding up the green transition — both implying more durable inflation pressure. She’s charted a course out of subzero rates by October in a return to more “normal” settings.

But despite the ECB acting much more slowly than its peers, some still fret that it’s moving too rapidly as the continent’s pandemic rebound runs up against the price shock and dwindling confidence over the war.

As the cost of staples soars, almost half of German citizens say they’ve had to cut back strongly or very strongly on consumption, according to a survey published last week.

“There seems to be a priority in this Governing Council to signal they’re doing something on inflation even though there are growth risks,” said Evelyn Herrmann, an economist at Bank of America in Paris. “It’s a very single-sided discussion that largely ignores risks that inflation could move the exact opposite way.”

These calls to slow down in order to take into account the uncertain economic climate have been less frequent. But even when they’ve come — like from dovish Executive Board member Fabio Panetta — there’s been an acknowledgment too that rates must rise from record lows to keep price expectations in check.

Spain’s Pablo Hernandez de Cos, another dove, last week summed up the change of tone that’s left only the size of the initial rate hike in question.

While stressing that policy-normalization must be “gradual,” he said, “it’s crucial that inflation expectations remain anchored and significant indirect or second-round effects that could put that anchoring at risk are avoided.”

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