The European Central Bank will ease the pace of interest-rate hikes to a quarter-point next week as it weighs a pullback in bank lending against still-stubborn inflation and a surprisingly resilient economy, according to a Bloomberg survey of analysts.
(Bloomberg) — The European Central Bank will ease the pace of interest-rate hikes to a quarter-point next week as it weighs a pullback in bank lending against still-stubborn inflation and a surprisingly resilient economy, according to a Bloomberg survey of analysts.
Beyond the May 4 decision, officials will deliver two more moves of 25 basis points, in June and July, taking the deposit rate to a peak of 3.75%, the poll showed. The first cut in borrowing costs is envisaged as early as October.
While policymakers including Chief Economist Philip Lane have signaled that an increase is very likely next Thursday, most have refrained from concrete guidance on its size. Instead, they’ll take their cue from key inflation and bank-lending data due in the coming days as they settle on either a quarter- or half-point step.
Investors are betting on the smaller increment, assigning only a 20% chance of the larger one materializing. Executive Board member Isabel Schnabel has said the latter is “not off the table,” however.
“The biggest challenge for the ECB will be deciding between a 25 basis-point and 50 basis-point rate hike, as well as on appropriate communication going forward,” said Veronika Roharova, head of euro-area economics at Credit Suisse.
“Recent upside surprises in growth, core inflation and wages argue for further decisive action, but a tightening in credit standards and a slowdown in loan growth suggest the risk of overtightening is rising,” she said.
The vast majority of survey respondents predicts the ECB will avoid such an error. But with most of the effect from the 350 basis points of monetary tightening since last July still in the pipeline, it’s getting ever harder to judge when enough is enough.
“It could very well happen that in a few months — and with hindsight — the May and June decisions will be labeled a ‘policy mistake,’” said Carsten Brzeski, global head of macro at ING. He predicts rates will peak that month at 3.5%.
Officials have generally been tight-lipped on how high borrowing costs will go, though Dutch central-bank chief Klaas Knot has said he’s “not uncomfortable” with current money-market wagers on the deposit rate hitting 3.75% by September.
What Bloomberg Economics Says…
“Our view is that the ECB will soon stop lifting rates. We expect a final 25-basis-point hike in June, bringing the deposit rate to 3.50%, but sticky core inflation skews the risks to the upside for one more move of the same size in July.”
— David Powell, senior euro-area economist. Click here to read more
Assisting such assessments, data Friday will reveal whether the euro zone dodged a winter recession. Economists in a separate poll estimate the 20-nation economy expanded by 0.2% in the first quarter.
Only a quarter of survey respondents expect a downturn. But more than half are “a little concerned” about tighter financing conditions after the banking collapses in the US and Switzerland.
Inflation and spillovers from policy shifts elsewhere are seen as the biggest economic risks.
“The peak in core inflation, and by extension the policy rate, is close,” said Claus Vistesen, chief euro-zone economist at Pantheon Macroeconomics. “But the question is how sure the ECB needs to be on the trend in core inflation before signaling an end to the tightening cycle.”
By their June meeting, when fresh projections will be available, policymakers may better be able to pass judgment on the region’s economic health. They’ll also know how much long-term funding banks intend to repay on top of the €477 billion ($525 billion) that expire that month.
Economists predict the ECB’s balance sheet will shrink from €7.7 trillion currently to €6.9 trillion by year-end — also driven by a slightly faster rolloff of bonds held under the Asset Purchase Program in the second half of the year.
They see it contracting to €4 trillion in the longer term as past stimulus is withdrawn.
“The euro-area economy is proving much more resilient that many had expected,” said Andrzej Szczepaniak, an economist at Nomura who predicts two more half-point rate hikes in May and June, and a peak of 4.25% in July. “Now’s not the time to step back.”
–With assistance from James Hirai.
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