ECB 50-basis-point hike in March a done deal, May and June undecided

LONDON – The European Central Bank will raise its deposit rate at least twice more, taking the terminal rate to 3.25% in the second quarter, with a vast majority of economists polled by Reuters saying the greater risk is it goes even higher.

ECB President Christine Lagarde said at a news conference this month that the euro zone’s central bank would add 50 basis points to the deposit rate. Economists took her at her word, with all 57 of them polled in the Feb. 10-15 period expecting a deposit rate hike to 3.00% at the March 16 meeting.

The ECB will follow up on March‘s move with a further 25-basis–point lift next quarter, medians showed, giving a terminal deposit rate of 3.25% and a refinancing rate of 3.75%. The US Federal Reserve and the Bank of England are also nearing the end of their tightening cycles.

But there was no clear consensus in the poll.

Twenty-six of 56 respondents expected a hike of 25 basis points next quarter, 19 expected a 50–basis–point move, while nine said no move and a further two said the ECB would accelerate its pace of tightening and deliver a 75-basis–point increase.

In response to an additional question, an overwhelming majority – 26 of 28 – said the risk was the terminal deposit rate ends higher than they expect, rather than lower.

“Given the persistently high underlying inflation pressures, the risk for our ECB call is skewed to the upside,” analysts at DWS Group said.

As well as raising the deposit rate by 50 basis points, the ECB will do the same with the refinancing rate next month, taking it from 3.00% to 3.50%, the poll showed.

“March is more or less basically a done deal. There will now be a lot of competing about what happens in May,” said Melanie Debono at Pantheon Macroeconomics.

Pierre Wunsch, head of the National Bank of Belgium and a member of the ECB Governing Council, said earlier this month that rate hikes could exceed market expectations. Markets are currently pricing in a terminal deposit rate of 3.50%.

Inflation in the 20 countries using the euro fell to an annual rate of 8.5% last month from 9.2% in December, official data showed. While the poll suggested it would continue to fall, it was not expected to reach the ECB‘s 2.0% target until 2025 at least.

Given a host of positive developments in recent months, inflation could fall faster than earlier thought, ECB policymaker and Bank of Spain Governor Pablo Hernandez de Cos said on Wednesday.

Still, none of the 22 respondents to another question said the ECB would cut rates this year.

Despite soaring costs consumers have continued spending and the economy expanded 0.1% last quarter. While the poll said it would contract 0.2% this quarter, it was expected to eke out 0.1% growth in the second quarter, dodging the technical definition of recession.

The first-quarter prediction was a slight upgrade from a January poll. The third- and fourth-quarter forecasts were for 0.2% and 0.3% growth, respectively.

Gross domestic product was predicted to expand 0.4% this year before growth accelerates to 1.2% in 2024. – Reuters