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If there is just one takeaway investors should zero in on during June 10's European Central Bank monetary policy meeting, it should be any change made to its 2023 inflation forecast.

While this may seem far off into the future, it has immediate relevance to markets today. That’s because the bank, led by Christine Lagarde as its president, has repeatedly emphasized it will begin tightening the reins only after underlying price pressures not just “robustly” move inflation toward its midterm target of 2%, as is already the case, but “consistently” as well.

Any sign pricing pressure is set to rise markedly higher throughout the bank's entire forecast horizon would endanger the current truce between hawks and doves at the bank, largely grouped along the continent’s north-south divide.

“We’re emerging from a period of deflationary pressures that justified the bank’s ultra-accommodative stance,” Helaba economist Ulf Krauss tells Fortune. “Yet this is also what the ECB fears: Whether it’s the negative interest charged on deposits, the asset purchases, or the liquidity tenders, it has deployed a number of instruments that cannot simply be rolled back without consequences.”

First pegged in December at an annual 1.4% and maintained in March, economists expect the ECB will be unable to escape revising the 2023 figure higher, due to price pressures bubbling up from commodity markets. The key question now will be by how much.

Monetary flood

Actual tightening has not been in the ECB’s vocabulary since it raised its benchmark rates in July 2011. Lagarde’s predecessor and Italy’s current head of a technocratic government, Mario Draghi, managed to complete his entire eight-year term without once hiking rates.

Abandoning dogma in favor of flexibility, the Italian refashioned the institution from an inflation fighter in the style of Germany's Bundesbank to a more modern central bank that resembles the U.S. Federal Reserve.

His willingness to employ the ECB's own balance sheet to purchase debt and drive down yields, known as quantitative easing (QE), raised the ire of his northern colleagues, who criticized the decision to flood markets with tens of billions of newly minted euros every month.

This is where June 10's batch of fresh quarterly staff projections come into play. These economic forecasts play a key role in calibrating the firepower of its main QE instrument.

With conventional policies like cutting interest rates already exhausted, the pandemic emergency purchase program (PEPP) is tasked to ensure what the ECB deems to be “favorable financing conditions” among debt markets and commercial lenders.

In May the amount of debt bought under PEPP hit €80.7 billion, the largest intervention in sovereign bond markets since last July. Lagarde and her Governing Council deliberately expanded the scale to discourage investors prematurely betting the bank will be forced to taper back the program.

These purchases help ward off deflationary risks among ailing economies in Italy, Greece, Spain, and Portugal. Hawks in Northern Europe would like to see a reduction, or tapering, of the monthly rate, at least back to the €60 billion levels from before March.

As long as there is no significant revision to the ECB’s medium-term inflation forecast, UniCredit wagers this monthly pace of monetary expansion will continue for the third quarter.

“We suspect that the hawks will fold and start focusing on the September meeting, when tapering ahead of a possible termination of PEPP in March 2022 will likely be on the table,” it wrote in a research note to clients last week.

Economists broadly agree that in the short term, the ECB underestimated inflationary pressures and will have to revise staff projections for this year and next from their current low levels. The harmonized index for consumer prices (HICP) in the euro area already increased at an estimated annual rate of 2% in May, the highest in two and a half years, having declined by 0.3% in December.

The bank has telegraphed to markets it has taken a relaxed view of the recent rise for three reasons. First, prices were abnormally low during the pandemic, in part due to Germany’s cut in its value-added tax to spur consumption. These baseline effects putting pressure on prices will wash out over the course of 2022.

Second, policymakers will view much of the current rise as a function of the economy reopening. The release of pent-up demand threatens to overwhelm vendors, creating shortages. Yet this ongoing supply-side shock to prices should also subside in the near term.

Finally, the key driver in the basket of goods and services exerting upwards pressure thus far is energy costs. And while higher oil prices affect consumers, central bankers tend to assign them less significance owing to their volatility.

“Subdued inflation in 2022 should allow the ECB to ‘look through’ the temporary spike and argue that policy support remains warranted for longer,” economists at UBS wrote in its preview of June 10’s meeting.

Flashing signals

Minutes from the last ECB monetary policy discussion in April indicated policymakers were assuaged by indications that households have taken little notice of the flashing inflation signals priced in by capital markets. They also point to significant slack in labor markets that undermines workers’ ability to demand higher wages and helps anchor expectations.

One new factor modeled in the June staff projections will be U.S. President Joe Biden’s $1.9 trillion fiscal stimulus bill, the effect of which on demand for construction materials could exacerbate an already tense commodities market.

A key element to watch out for then is the assumptions underlying the ECB’s midterm forecasts, particularly with respect to the oil price and euro/dollar cross rate, which both pose material implications for euro-area HICP. These were last estimated at $53.70 for a barrel and $1.21, respectively.

The ECB press briefing, along with fresh U.S. inflation figures expected later on June 10, sets the tone ahead of this week’s key Federal Reserve meeting, which will update its own forecasts and guidance on the pace of its $120 billion QE program.

In April, Fed Chair Jerome Powell said further substantial progress toward restoring full employment would need to be made before he would begin discussing any changes to policy. Importantly, the ECB has indicated its tightening plans will lag that of the Fed’s since its vaccination program was slower off the block.

Even if Lagarde’s staff forecasts inflation in 2023 will hit the 2% threshold, economists suspect numerous doves on her Governing Council will successfully argue not to jump the gun. That’s because the bank has in the past consistently overestimated upward pressures on prices over the medium term.

“For the moment equity markets are enjoying a kind of Goldilocks period, where inflation is not too hot and not too cold,” Helaba’s Krauss says.

Recent HICP data looks to have put any fears of deflation to bed, and a surplus of demand chasing a dearth of goods means companies can protect margins by passing on higher costs to the customer. At the same time, he argues, consumer prices are not running high enough to force central bankers into tightening prematurely.

That means the truce within the ECB tower can be maintained. For now.

“The most important goal of the ECB is not maximizing economic output, or even maintaining the price stability cited in its mandate, it’s the preservation of the single currency,” says Krauss.