According to economists surveyed by Reuters, the European Central Bank will almost probably raise its deposit rate by 25 basis points on May 4 before raising it to 3.50% or higher in June as core inflation stays stubbornly high.

Even though core readings reached a new high, euro zone headline inflation last month continued to be over three times the ECB’s 2% objective, and peak deposit rates were now projected to be slightly lower.

The dispute over the pace and the distance to the peak deposit rate still exists after ECB President Christine Lagarde stated last week that the institution “still has a bit of way to go” with monetary policy.

According to 57 out of 69 economists surveyed by Reuters in their most recent poll, the central bank was anticipated to hike rates for a seventh consecutive meeting next week, but scale back the increase to 25 basis points.

The deposit rate would then increase to 3.25% if realised, in line with market forecasts.

The ECB has increased rates by at least 50 basis points over the course of six meetings, but some decision-makers are still wary because the effects of earlier increases have not yet been seen in full.

However, 12 respondents anticipate a 50 basis point move the following week.

“Even though headline inflation will come down further, sufficient pipeline pressure in services and stubbornly high core inflation argue in favour of more rate hikes and a ‘high for longer’ approach,” said Carsten Brzeski at ING, who doesn’t see a rate cut until the second half of 2024.

“The ECB will not consider any reversal of the current stance until both projected and actual inflation are clearly moving towards 2% again.”

The ECB started its rate hike cycle later than the majority of other significant central banks, but it is currently one of the few that isn’t nearly ready to pause.

In May, the U.S. Federal Reserve was predicted to give its final 25-basis-point rate increase before keeping interest rates unchanged in 2023. Although still high inflation may alter that prediction, the Bank of England was expected to attain its terminal rate by the end of the following month.

The deposit rate peaked in June, according to medians, although it peaked in Q3 of a March survey at 3.75%. However, 30 of the 68 had the rate at 3.75% or higher at year’s end, a sizable minority.

A separate Reuters poll forecast that the euro currency would gain about 2% to $1.12 in 12 months, rewarding the ECB’s hawkish outlook.

It was anticipated that inflation would not reach goal until at least 2025, despite the fastest rate hike cycle in history. In response to a follow-up question, 32 out of 40 respondents (80%) stated that the greatest risk was that inflation will be higher than expected in 2023.

“Headline inflation has been tumbling but entirely due to energy prices and the largest downward pressures from base effects are already behind us,” said Ken Wattret at S&P Global Market Intelligence.

“Inflation will moderate over time but the key issue for 2023’s outlook is the degree of stickiness in core inflation.”

Even though price pressures would decrease during a recession, the 20-country bloc’s economic prospects appear positive given the 40% likelihood of one occurring within the next two years.

This is a sharp contrast to a few months ago when it seemed like a recession was unavoidable and to the largest economy in the world, which was predicted to go into one this year.

However, it was predicted that the economy would only expand by 0.1% in Q2, 0.2% in Q3 and Q4, and 0.6% on average this year before bouncing back to 1.1% in 2019.

(Adapted from Reuters.com)

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