The European Central Bank’s interest rate spike will be much higher than previously thought just a month ago, economists polled by Reuters said, adding that stubbornly high inflation would push monetary leaders to be more aggressive.
After pointing to a 50 basis point hike at next week’s ECB governing council meeting (Thursday, March 16), ECB President Christine Lagarde reaffirmed this outlook on Sunday saying the increase is “very likely.”
The 60 economists polled by Reuters between March 7 and 9 believed it, saying the bank’s deposit rate will rise 50 basis points to 3.00 percent on Thursday.
The median of the survey indicates that the central bank of the euro area will undertake increases of 25 basis points at its three next meetings – in May, June and July – to end up at a terminal deposit rate of 3.75%, above the maximum of 3.25% expected in a February survey.
“A rate hike of 50 basis points next week seems like a given. The most heated debate at the ECB will revolve around the path of monetary policy beyond the March meeting,” said Carsten Brzeski of ING (AS:INGA).
Markets foresee a maximum of 4.00%.
Federal Reserve Chairman Jerome Powell said on Tuesday that the central bank that oversees the world’s largest economy will likely have to raise interest rates more than previously expected, in response to recent strong macroeconomic data, adding that the Fed is prepared to act longer.
But like the ECB’s monetary leaders, who have been discussing how far rates should be raised in the 20 countries that use the euro, economists surveyed were also divided.
Although the median indicated that the deposit rate will peak at 3.75%, only 19 of the 60 economists surveyed shared this view. Twelve said it will be higher, while 29 said it will be lower. The highest forecast was 4.25%.
However, more than 90% of those who answered an additional question, i.e. 35 out of 38, stated that the risk is that the final rate will be higher than expected.
Eurozone inflation, which stood at 8.5% in February, more than four times above the ECB’s 2% target, is expected to decline but remain above target at least until 2025.
According to the survey, the average will be 5.8% this year and 2.5% next year.
“The real economy was stronger than expected at the beginning of the year, implying less slack than expected, while core inflation was much higher,” said Luca Mezzomo of Intesa Sanpaolo (BIT:ISP).
Some economic data has been better than feared, especially over the winter, but the economic recovery remains timid and several indicators added on Monday to signs that, although a recession has been avoided, there is no rebound in sight.
According to the poll, there is now only a 34 percent chance of a recession next year, up from 50 percent in a January poll.
However, euro area growth will be far from stellar, with a 0.1% contraction forecast for this quarter, followed by an expansion of just 0.1% in the next. In the following two quarters, growth will be 0.2%, according to forecasts that have barely changed since February.
In the whole of this year, the economy will expand by 0.5% before growth accelerates to 1.2% in 2024.