LONDON — The European Central Bank is set to hike its deposit rate by 50 basis points to 2.00% next week, even as the euro-zone economy is almost certainly in recession as it struggles against inflation five times its target, according to one Reuters poll.
Since the start of its anti-inflation campaign in July, later than its peers, the ECB has hiked rates at an all-time high, already raising its key deposit rate by 200 basis points to 1.50%.
Banks will earn 2.00% on deposits after policymakers meet on Thursday, the highest since 2009, according to Reuters poll December 5-8. The refinancing rate will also increase by 50 basis points to 2.50%.
The median view for the deposit rate was held by 51 out of 60 economists surveyed, while two said the ECB would be more cautious and seven said it would be more aggressive.
At its last meeting at the end of October, the Governing Council raised interest rates by 75 basis points.
The US Federal Reserve is also widely expected to pull back to 50 basis points after four straight hikes of 75 basis points at the conclusion of its monetary policy meeting on Wednesday, the day before the ECB decision. ECILT/US
“Next week’s ECB meeting is one of the few meetings where the central bank will make a decision after the Federal Reserve and not before it. A slowdown in the pace of Fed rate hikes could also affect the ECB,” said ING’s Carsten Brzeski.
“The decline in headline inflation, while saying little about the impact of rate hikes so far, may at least take some of the urgency out of proceeding with jumbo rate hikes.”
Prices rose much less-than-expected last month by 10.0% yoy, suggesting inflation may have peaked in the 19 countries that use the euro and strengthening the case for the ECB , to slow their rate of increases.
The results of the survey were consistent, showing that inflation would peak at 10.3% this quarter and then recede. But it was never seen at the bank’s 2.0% target at any point in the survey period through 2025.
ECB President Christine Lagarde suggested at the bank’s last meeting that it would present a plan to reduce its bond holdings under the asset purchase program this month.
The survey said stocks would be reduced by 175 billion euros over the next year, with forecasts ranging from 75 billion to 600 billion euros.
TURN THE HEAT ON
Policymakers face a dilemma of tightening monetary policy as the currency bloc heads for recession. Respondents in the survey reported an average chance of 80% within a year.
Quarterly projections in the survey showed the economy would contract by 0.3% this quarter and 0.4% the next, which is the technical definition of a recession. It will then flatten out in the second quarter and rise 0.3% in the last two quarters of 2023.
Later this year, the survey of 69 economists showed it would grow 3.2% before contracting 0.1% in 2023. In 2024 it will grow by 1.3%.
When asked what kind of recession the bloc would suffer, the vast majority of respondents were short and perfunctory, although 20 out of 30 economists warned that risks to their growth forecasts skewed to the downside.
“We expect a brief recession related to the energy shock in the fourth quarter of 2022 and the first quarter of 2023, moderated by government measures and followed by a moderate recovery from the second quarter,” said Luca Mezzomo of Intesa Sanpaolo.
Energy costs have skyrocketed following Russia’s invasion of Ukraine, but many governments have imposed price caps and subsidies to support consumers as citizens head into the winter and need to heat their homes. – Reuters