MNI SOURCES: ECB Set To Lower 2026 Inflation Projection

The European Central Bank is likely to lower its inflation projection for 2026 to 1.7% or 1.8% in its June exercise, one or two tenths below the 1.9% seen in March, Eurosystem sources told MNI, adding that there could be a pause in rate cuts after a further 25-basis-point reduction next week.

“I certainly think we will have an average rate of 1.8% for 2026, but the risk must be on a degree lower, so 1.7% can't be ruled out,” one official said, pointing to the decline in energy costs and euro appreciation, but adding that the implications for prices from realised inflation, together with wages, risks to growth and the outlook for fiscal spending, are probably broadly balanced.

Despite this downward revision, this deviation below 2% will not be considered strong enough to automatically trigger an additional rate cut beyond the June meeting, as some of the drivers of this inflation revision could reverse course given uncertainty over international trade, sources said.

“A couple of tenths depend on energy prices and euro appreciation, that could change again,” one of the sources said, referring to the extent of the 2026 inflation downgrade, and adding that a rates pause was likely in July, though that a resumption of cuts in September could be justified if June’s projections are confirmed in that month’s exercise.

BALANCED RISKS

Inflation risks are more balanced than it may seem and not necessarily skewed to the downside, the source added, noting that this will determine whether the easing cycle ends in June or extends further. (See MNI INTERVIEW: Risk Rising Of Sub-2% ECB Rates-Malta's Demarco)

“I think we will largely look through it, for now at least, with the uncertainties into 2027 probably enough for now at least to give pause to assume we are close to terminal rate,” another source said, regarding the 2026 projection downgrade.

Inflation which comes below the 2% target for a quarter or slightly longer in 2026 could help to dampen some of the pick-up in medium-term inflation expectations seen in recent months, he said, adding that the projections could allow for an additional cut at some point beyond June.

“Plenty of opportunity to cut to 2% in June, as I have fully expected, with a degree of flexibility to cut once more if, and it is still an if, we see the need,” he said.

The inflation projection for 2027 is likely to be lowered to 1.9% from March’s 2%, another source said, adding that he did not think the cuts to the inflation projections would pressure the ECB into speeding up easing.

 “No doubt the 2026 headline projection will be lower than in March. We've pencilled in 1.8% for 2026 and 1.9% for 2027, but I could easily see those numbers come in at 1.7% and 2%, as the risk on a lower number is certainly currently tilted to next year,” the source said. 

“Given the likely move back towards the target in 2027 and the fact much of the reasoning behind a lower headline rate could easily reverse, policymakers can afford to look through the projection for now.” (See MNI SOURCES: Risks Tilt To Downside As ECB Mulls Path Below 2%)

STICKIER CORE

Projected core inflation is seen as stickier, with an upward revision of one or a couple tenths versus March, though actual May data is likely to see core inflation fall to 2.5%, backing the data-dependent and meeting-by-meeting approach outlined by the ECB. Despite the upward revision of core for this year, the number is also seen falling to 1.8% or 1.9% in 2026, compared to the 2% seen in March, sources said.

An ECB spokesperson declined to comment.