ZEW Survey Among Financial Market Experts: Experts Expect Inflation to Rise in the Eurozone in the Medium Term and the ECB’s Monetary Policy to Become Less Accommodating

In the median, inflation rate in the Eurozone will be two percent in the current year and 2.4 percent in 2012. These are the findings of a survey among 227 financial market experts conducted by the Centre for European Economic Research (ZEW) in Mannheim in February 2011.

The experts surveyed by ZEW expect that, due to the increasing risk of inflation, the European Central Bank’s monetary policy will become less accommodating in the future. A less accommodating policy means that the ECB will reduce its support of the economic activity and the banking sector. The main reasons for this change of policy are the significant improvement of the economic situation and the fact that lower risk premiums indicate a normalisation of trading on the inter-bank market. In order to fight the financial crisis, the ECB had cut the key interest rate to stimulate economic growth and implemented unusual liquidity measurers, which allowed banks to refinance with the ECB when refinancing via the inter-bank market was not possible. All these measures can now be withdrawn one by one. However, the financial market experts surveyed believe that the implementation of changes by the ECB will be a very gradual process.

For instance, eighty percent of the experts surveyed expect that the ECB will increase the interest rate on the main refinancing operations in about four to twelve months time. The median time expected for the increase of the ECB’s most important interest rate is October 2011. On a one-year horizon, the experts expect that the interest rate on the main refinancing operations will be between 1.0 and 1.5 percent. On a two-year horizon, an interest rate between 1.5 and 2.5 percent is expected. Thus, the corresponding interest rate in the middle of the interval will be 1.25 percent in February 2012 and 2.0 percent in February 2013.

Thirty-two percent of the financial market experts believe that increasing the interest rate on the main refinancing operations is the right strategy, while sixty-eight percent consider the current level of one percent appropriate. As far as liquidity measures are concerned, half of the experts think that they should not be changed in the near future, whereas forty-eight percent endorse a withdrawal of theses measures.

For further information please contact

Dr. Sandra Schmidt, E-mail s.schmidt@zew.de

Frieder Mokinski, Phone +49 621/1235-143, E-mail mokinski@zew.de