The ECB will raise rates by 25 bp in July and will abandon negative rates at the end of September

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The ECB will raise rates by 25 bp in July and will abandon negative rates at the end of September

By Swathi Nair

BENGALLURU – The European Central Bank is expected to raise the deposit rate for the first time in more than a decade in July and take it out of negative territory at its next meeting in September, despite a 30% chance that there will be recession in a year, according to a Reuters survey of economists.

With inflation hitting its multi-decade high of 7.5% in April, and while almost every other central bank has already raised interest rates, the president of the BCChristine Lagarde last week backed calls for an soon rate hike by policymakers.

According to most economists surveyed between May 10 and 16, the bank is expected to end its bond-buying program in July and raise the deposit rate by 25 basis points a few weeks later.

Until recently, analysts expected the BC I would wait until the last quarter of the year to raise the deposit rate, currently at -0.50%.

Of the 46 of 48 economists who expect the deposit rate to rise in the third quarter, 26 said rates would rise 50 basis points by the end of the period, implying quarter-point moves at the July and September meetings. .

Another 18 respondents said the deposit rate would only rise 25 basis points in the third quarter and two said it would only rise 10 basis points to -0.40% at the end of the quarter.

An even clearer majority expect rates to turn negative by the end of the year. Some 90% of economists (43 of 48) said the deposit rate would be 0% or higher by then; 44% (21 of 48) said they would be at 0.25% by then; and 8% (4 of 48) said it would be 0.50%.

“There is widespread support for ending the monetary policy of negative interest rates in the BCbut they will take a very cautious approach to monetary policy normalization in light of considerable macroeconomic uncertainty and concerns about slowing growth,” said Jens Eisenschmidt, chief European economist at Morgan Stanley.

“It will be the first time in more than a decade that the BC raise rates – without the support of asset purchases – so taking smaller steps would allow the BC watch the reaction of the markets, with a possible fragmentation of financing conditions in the euro area likely to be a key concern”.

The results of the latest surveys continue to be lower than those of interest rate futures, which forecast an accumulated rise of 90 basis points for the rest of the year, that is, between three and four movements of 25 basis points.

Even this would leave the BC far behind the US Federal Reserve, whose interest rate is currently estimated at around 2.00-2.25% by the end of this year. [ECILT/US]

However, the survey also revealed that the window for raising rates is closing in BCwith a constant average 30% chance of a recession in the next 12 months, as the war in Ukraine drives up energy prices and erodes consumers’ purchasing power.

The bloc’s economy is forecast to grow 0.3%, 0.5% and 0.6% in the second, third and fourth quarters. This is a reduction compared to the 0.4%, 0.6% and 0.6% expected last month.

In annual terms, it is expected to grow 2.7% this year, compared to 2.9% and 2.3% next year, the same as was predicted last month.

The European Commission cut its growth forecast for the euro zone this year to 2.7% from 4.0% forecast in February, and raised its inflation forecast to 6.0% this year from 3.5%.

Rising inflationary pressures, fueled by persistently rising food and energy prices, have aggravated the cost-of-living crisis in the euro zone.

Prices will rise 7.7% this quarter, more than triple the target for the BC of 2.0% and more than the prediction of 7.3% given last month. It will taper off gradually over the next few quarters, but the medians don’t show it being on target until next year, the forecast horizon.

Asked about the impact of the cost-of-living crisis on growth, 19 of 25 economists said it would be serious and two said it would be very serious. Only four said it would be mild.

It will be more than six months before the crisis subsides significantly, according to 90% of respondents in another question.

Despite recession risks, unemployment in the single currency bloc is expected to remain near record lows at 6.9% and 6.8% this year and next.

Meanwhile, median wage growth is forecast to be 3.0% this year, according to the survey median.

“Although the current dynamics are causing wage demands to rise, companies remain cautious due to the weakening outlook,” said Bas van Geffen of Rabobank.

“Therefore, the anecdotal data also points to shorter salary agreements, so that there is flexibility to adjust them next year, either above or below, depending on inflation. So so far it looks like it’s about catch-up wage growth rather than future-oriented growth.”

(For other stories from the Reuters Global Economic Survey:)

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