The ECB avoided a half-point hike for minor moves from July

Efforts by the European Central Bank’s hawks to push through an initial half-point rate hike will fail as policymakers agree on a series of smaller hikes, according to a Bloomberg poll of economists.

The ECB will hike the deposit rate – now at -0.5% – by a quarter point in July and again in September, the survey showed. While that’s in line with President Christine Lagarde’s pledge to end borrowing costs below zero in the third quarter, it’s less aggressive than the path taken by officials like Austria’s Robert Holzmann.

Calls for more vigorous action as the ECB ends years of stimulus measures follow another euro-area inflation record last month, when prices rose 8.1% – more than four times the target.

However, Lagarde is expected to use her June 9 press conference to reiterate the more cautious exit strategy she outlined last week – namely an impending end to large-scale asset purchases ahead of next month’s rate hike.

“The ECB will effectively commit to a rate hike on deposits in July and reiterate its intention to end QE as planned by the end of the second quarter,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics Ltd. “The question is whether it will be 25 basis points or 50 basis points. We think the former, but the pressure is mounting to act more decisively.”

Derivatives markets believe the answer will be 50, and move Thursday to price in a move of that size.

New projections, which will be prepared with all 19 member states of the euro zone, will be decisive for the ECB’s decision. Substantial upward revisions to inflation are expected this year and next, along with a much weaker outlook for economic growth due to Russia’s war in Ukraine and supply chain bottlenecks in Asia.

Price growth is likely to reach the 2% target in 2024 – a prerequisite for rate hikes under the ECB’s leadership – although the forecast range of 1.2% to 3% is wide. The ECB itself struggles to accurately forecast inflation and has underestimated it since energy and food costs began to rise last year.

“Many members of the Governing Council have lost confidence in the ECB’s ability to forecast inflation in the current environment and have seen enough signs of upward inflationary pressures to warrant action,” said Jan von Gerich, chief analyst at Nordea . The only reason they won’t hike rates in June is an old pledge that QE must officially end first, he said.

Respondents expect quarterly increases in the deposit rate to 1% from December to September next year. The main refinancing rate is expected to reach 1.5% by the end of 2023 – the level that a majority of economists consider neutral and will neither limit nor boost economic growth.

That scenario is unlikely to please doves, including board member Fabio Panetta, who has so far warned against rate hikes, instead calling for a gradual approach and maybe even a pause at zero.

“The inflation environment will require a faster normalization process,” said Ulrike Kastens, economist at DWS Group, who “does not expect any signs of monetary tightening – yet”.

Officials have stressed that financial conditions will remain accommodative even if interest rates start to rise and have not discussed trimming the stack of bonds bought under the ECB’s regular and pandemic programs.

But the balance sheet could already shrink this year. Economists expect banks to repay around 670 billion euros ($718 billion) in loans as crisis-era maturities expire.

This, coupled with the completion of net asset purchases, has worried some that bond yields could rise in vulnerable eurozone members. The spread between Italian and German 10-year bonds has widened by 42 basis points since the last ECB meeting. For Spain, it’s up 20 basis points. The ECB avoided a half-point hike for minor moves from July

Fry Electronics Team

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