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Euro zone consumers adjusted their near-term inflation expectations downward in January but continued to anticipate economic contraction, reflecting a cautious outlook on the region’s growth prospects, according to the European Central Bank’s (ECB) Consumer Expectations Survey released on Friday.
Median inflation expectations for the next 12 months declined to 2.6% from 2.8% in the previous month, while longer-term expectations for three years ahead remained steady at 2.4%, still above the ECB’s 2% target.
The downward shift in inflation expectations was accompanied by a reduction in household income growth projections, which fell to 0.9% from 1.1%. This suggests that consumers expect a decline in real earnings, which could weigh on overall economic activity and consumption.
ECB Rate Cut Expectations Strengthen Amid Weak Growth Outlook
The survey results reinforce the case for additional monetary easing by the ECB, with a rate cut at the upcoming March 7 meeting widely anticipated. Market participants are now focusing on the extent of further easing in the coming months, with expectations ranging between two and three additional cuts, depending on developments in global trade policy and economic data.
Despite a slight improvement in sentiment, consumers still foresee a 1.1% economic contraction over the next year, compared to the 1.3% decline forecasted in December. The persistent negative growth outlook highlights the challenges facing the euro zone, increasing pressure on policymakers to implement measures that support economic recovery.
The ECB’s policy decisions in the coming months will be crucial in determining the pace of economic stabilization, particularly as external risks, including trade policy developments in the U.S., continue to influence investor sentiment and monetary policy expectations.
