The European Central Bank will step up its fight against stubborn inflation by raising interest rates four more times and unwinding its €5 trillion ($5.3 trillion) bond portfolio at a quicker pace, according to a Bloomberg survey of economists.
(Bloomberg) — The European Central Bank will step up its fight against stubborn inflation by raising interest rates four more times and unwinding its €5 trillion ($5.3 trillion) bond portfolio at a quicker pace, according to a Bloomberg survey of economists.
Three hikes of 25 basis points each will follow next week’s all-but-certain half-point move — bringing the deposit rate to 3.75% in July, respondents said.
Goldman Sachs and Deutsche Bank both predict that level, though they expect it to be reached in June. On the upper side, Morgan Stanley and Barclays see a so-called terminal rate of 4% — matching money-market expectations.
JPMorgan and Citi, meanwhile, say the ECB will probably stop at 3.5%.
The more aggressive path for borrowing costs compared with Bloomberg’s last survey will be accompanied by faster reductions in the stock of assets bought under previous stimulus drives. The initial trimming of €15 billion a month through June is seen gradually rising to double that by 2024.
Expectations for a tougher ECB response stem from record underlying inflation that’s emboldened some hawkish officials. The gauge, which excludes costs like energy and food, is accelerating even as headline price gains fade. That divergence is fueling tensions on the Governing Council over how much must still be done.
“The biggest challenge will be calibrating and communicating the appropriate amount of policy tightening in the coming months, given sharply lower energy prices and weakening loan growth on one side, and still-rising core inflation on the other side,” said Veronika Roharova, head of euro-area economics at Credit Suisse.
While ECB Chief Economist Philip Lane has said borrowing costs could stay at their peak for “a fair number of quarters,” analysts expect them to remain there for a shorter period compared with the previous survey. The first rate cut, to 3.5%, is anticipated in February 2024, followed by another in July.
Respondents are evenly split on whether the ECB is still playing catchup in tackling inflation — the first time a majority doesn’t consider it to be lagging behind in its response. More than half is also convinced that officials won’t push rates too high.
“So far the ECB had it relatively easy as rates were low and it was behind the curve,” HSBC economist Fabio Balboni said. “But as rates get into restrictive territory and core inflation stays resilient, the divergence of views between the Governing Council members that want to keep pushing rates higher and those that fear the risk of over-tightening will increase, making it harder to agree on the way forward.”
Next week’s meeting will be framed by a new set of quarterly economic projections that account for the recent plunge in energy costs. Likely featuring a more benign outlook for headline inflation alongside quicker underlying price growth, the forecasts could intensify a debate that began in February over which measure the ECB should focus on.
Portuguese central bank chief Mario Centeno has said officials must look “very carefully” at the new numbers.
The “ECB will be torn between most recent higher core inflation on the one side and lower inflation forecasts for the coming years on the other side,” said Rainer Singer, an economist at Erste Group.
This year’s outlook for economic growth should be revised higher, meanwhile. Survey respondents also no longer expect a recession — reinforcing arguments backing a tougher assault on inflation.
(Updates with banks’ individual forecasts starting in third paragraph.)
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