By Francesco Canepa and Balazs Koranyi
FRANKFURT (Reuters) - The European Central Bank expects inflation to remain above its 2% target for the next three years, one source told Reuters, more than markets currently expect and signalling its fight against runaway prices is far from over.
The ECB is certain to raise interest rates for a fourth consecutive time on Thursday to rein in inflation, and will also announce new quarterly economic projections, used by investors to work out how many more hikes may be on the cards.
Driven by factors ranging from Russia's invasion of Ukraine to the impact of pandemic-era stimulus, inflation across the 19 countries that use the euro reached 10.6% in October before falling back last month.
The new projections will put inflation comfortably above 2% in 2024 and just above it in 2025, said the source, who spoke on condition of anonymity because the forecasts are not yet public.
The new forecasts, which are regarded as crucial in informing the ECB's policy moves until a fresh round of estimates is published in March, are higher than the market currently expects for those two years.
An ECB spokesperson declined to comment.
The ECB's forecasts rarely prove accurate but the bank uses them as an input in its decisions because it targets "medium term", rather than current, inflation and any change it makes needs several months to work its way through the economy.
Some ECB policymakers, particularly among "hawks" who favour higher rates, have recently voiced scepticism about its forecasts and called for a greater focus on current readings.
Economists polled by Reuters foresaw inflation at 6.0% in 2023, 2.3% in 2024 and 1.9% in 2025. They also expected the ECB to raise its deposit rate by 50 basis points to 2% on Thursday before taking it to 2.50% by March and 2.75% by the middle of next year.
The ECB is also seen letting 175 billion euros ($186.01 billion) worth of debt expire next year, out of the 5 trillion euros it owns, to mop up cash from the banking system and drive up long-term borrowing costs.
Some on the ECB's Governing Council, such as Bundesbank President Joachim Nagel, have called for this "quantitative tightening" to start by March, while more dovish members are hoping for a later start.
The ECB is due to sketch out its QT plan on Thursday.
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