The European Central Bank will almost certainly add 25 basis points to its deposit rate on May 4 and then take it to 3.50% or higher in June as core inflation remains persistently high, according to economists polled by Reuters.
Eurozone headline inflation moderated further last month but remained over three times the ECB’s 2% target and despite core readings rising to a record high, the peak deposit rate was now seen slightly lower.
ECB President Christine Lagarde said last week the central bank “still has a bit of way to go” with monetary policy, so the debate about the pace and how much more to the peak deposit rate remains.
The central bank was expected to raise rates for a seventh straight meeting next week, but step down to a 25 basis point move, according to 57 of 69 economists in the latest Reuters poll.
If realised, that would take the deposit rate to 3.25%, in line with market expectations.
The ECB has added at least 50 basis points in six successive meetings but some policymakers remain cautious as past hikes are yet to fully filter into the economy.
Still, 12 respondents expect a 50 basis point move next week.
“Even though headline inflation will come down further, sufficient pipeline pressure in services and stubbornly high core inflation argue in favour of more rate hikes and a ‘high for longer’ approach,” said Carsten Brzeski at ING, who doesn’t see a rate cut until the second half of 2024.
“The ECB will not consider any reversal of the current stance until both projected and actual inflation are clearly moving towards 2% again.”
While the ECB began its hiking cycle later than most major central banks, it is now one of a few not quite ready to pause.
The U.S. Federal Reserve was expected to deliver a final 25-basis-point hike in May and then hold rates steady in 2023. The Bank of England was predicted to reach its terminal rate next month, although still elevated inflation might change that view.
Medians showed the deposit rate peaking at 3.50% in June while in a March poll it was seen topping out at 3.75% in Q3. Still, a significant minority, 30 of 68, had the rate at 3.75% or higher by year-end.
The common currency was rewarded by the ECB’s hawkish outlook – predicted to strengthen around 2% to $1.12 in 12 months, according to a separate Reuters poll.
Despite the fastest rate hike cycle on record, inflation was not expected to fall to target until at least 2025. In response to an additional question, 80% of respondents, 32 of 40, said the bigger risk was 2023 inflation would be higher than they expect.
“Headline inflation has been tumbling but entirely due to energy prices and the largest downward pressures from base effects are already behind us,” said Ken Wattret at S&P Global Market Intelligence.
“Inflation will moderate over time but the key issue for 2023’s outlook is the degree of stickiness in core inflation.”
While a recession would bring down price pressures, economic prospects for the 20 country bloc are looking optimistic with only a 40% probability of a recession within two years.
This is in stark contrast from a few months ago when a recession looked inevitable, and compared to the world’s biggest economy which was expected to enter one this year.
Still, the economy was expected to grow at just 0.1% in Q2, and 0.2% in Q3 and Q4 on a quarterly basis, and average 0.6% this year before rebounding to 1.1% next year.
(Reuters)