FRANKFURT (Reuters) - The European Central Bank cut its growth projections for the next two years while lifting some of its inflation forecasts, raising the spectre of stagflation, a period when the economy suffers a double whammy of no growth and high inflation.
Thursday's new projections show inflation slowing from a current rate of 5.3% to 3.2% next year and 2.1% in 2025, making only slow progress towards the bank's 2% target, despite the fastest streak of rate hikes in the ECB's 25-year history.
Inflation has been coming down all year after surging past 10% last year, but a robust labour market, healthy demand for services and relatively high corporate margins are keeping pressure on prices.
Underlying inflation was also expected to remain above target with the 2024 reading seen at 2.9% and 2025 at 2.2%.
That prompted the ECB to raise interest rates for the 10th straight time on Thursday, concerned that high inflation may be a bigger risk to the economy than economic stagnation.
The growth outlook has meanwhile continued to sour and the ECB now sees a 2023 expansion of just 0.7% after predicting 0.9% three months ago.
For next year, it sees the economy growing by 1.0% with no big upswing on the horizon.
The following are the ECB's projections for inflation and economic growth. Previous projections from June are in brackets.
2023 2024 2025
GDP growth: 0.7% (0.9%) 1.0% (1.5%) 1.5% (1.6%)
Inflation: 5.6% (5.4%) 3.2% (3.0%) 2.1% (2.2%)