LONDON, Jan 23 — The European Central Bank (ECB) will deliver 50 basis point interest rate rises at each of its next two meetings, according to economists polled by Reuters, whose forecasts still risk lagging behind policymakers’ guidance on how high rates will go.
Rate setters have failed to convince markets about their commitment to continue increasing borrowing costs to rein in inflation, evident in the poll, which showed the central bank would stop when the deposit rate reaches 3.25 per cent next quarter.
The latest poll findings come despite ECB President Christine Lagarde telling investors in Davos last week they should “revise their positions”, adding weight to earlier comments from Dutch and Latvian policymakers.
Although the euro zone’s central bank has been raising rates at its fastest pace on record, it has so far failed to bring inflation anywhere near its 2 per cent target. Prices rose 9.2 per cent in December from a year earlier, official data showed last week.
Lagarde and her Governing Council will take the deposit rate to 2.50 per cent on February 2, said 55 of 59 economists in the January 13-20 poll. They are likely to follow that up with another 50 basis point lift in March.
The central bank will then add 25 basis points next quarter before pausing, giving a terminal rate in the current cycle of 3.25 per cent, its highest since late 2008. In December’s poll, the rate was put at 2.50 per cent at end-March and was seen topping out at 2.75 per cent.
Asked how the risks were skewed to their terminal deposit rate forecasts, over two-thirds of respondents, 23 of 33, said it was more likely it ends higher rather than lower than they currently expect.
“The risk is they will actually be as aggressive as they have claimed. Lagarde and others have said they are in for the long haul where we are going to raise rates meeting by meeting in 2023,” said Silke Tober at the Macroeconomic Policy Institute (IMK).
“It’s a very clear risk but I happen to think it would be a mistake.”
The refinancing rate was expected to rise 50 basis points to 3.00 per cent next week and reach a peak of 3.50 per cent in March.
The US Federal Reserve, which began raising rates many months before the ECB, is forecast to end its tightening cycle after a 25 basis point hike at each of its next two policy meetings. It is then expected to hold rates steady for at least the rest of the year, according to a recent Reuters poll.
Growth upgrade
Inflation has already peaked in the 20-nation EU, the poll found, and will drift down, but was not seen at the ECB’s target until at least 2025. Inflation will average 6.0 per cent this year and 2.5 per cent next but will be 2.0 per cent across 2025.
A mild winter so far, falling gas prices and recent positive economic data meant some quarterly growth forecasts were upgraded in the latest poll from a December survey.
Although a technical recession was still predicted — with a 0.2 per cent contraction last quarter and 0.3 per cent in the current one — the economy was now expected to grow 0.1 per cent next quarter rather than flatline. It is forecast to expand 0.3 per cent in the following two quarters, unchanged medians showed.
When asked in an extra question whether the downturn is likely to be deeper, or shallower, than expected, all but one of the 36 economists said it was more likely to be shallower than deeper.
“Not only has the risk of severe, energy-driven recessions diminished markedly but the direction of travel of leading indicators, including our PMI data, signals a rising likelihood of an earlier pick-up in growth than expected,” said Ken Wattret at S&P Global.
Across this year, growth was pegged at 0.1 per cent, a turnaround from the 0.1 per cent contraction forecast last month. In 2024 it was expected to grow 1.3 per cent, unchanged from December’s prediction. — Reuters