POLL-ECB will raise the deposit rate by 25 basis points in July and abandon negative rates by the end of September


Band Swathi Nair

BANGALURU, May 17 (Reuters)The European Central Bank is expected to raise the deposit rate for the first time in more than a decade in July and lift it out of negative territory at its next meeting in September, despite a 30% probability of a recession within a year. , according to a Reuters poll of economists showed.

As inflation hit a multi-decade high of 7.5% in April and almost all other major central banks have already hiked interest rates, ECB President Christine Lagarde backed calls to an anticipated rate hike by policymakers last week.

The bank is now expected to end its bond-buying program in July and follow that with a 25 basis point hike in the deposit rate a few weeks later, according to a majority of economists polled May 10-16.

Until recently, forecasters expected the ECB to wait until the last quarter of the year to raise the deposit rate, currently at -0.50%.

Of the 46 out 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 moves a quarter point at the July and September meetings.

Another 18 said the deposit rate would only rise 25 basis points in Q3 and two said it would only rise 10 basis points to -0.40% by the end of the quarter.

An even clearer majority expects rates to be no longer negative by the end of the year. About 90% of economists, or 43 out of 48, said the deposit rate would be 0% or more by then, 44%, or 21 out of 48, said it would be 0.25% then, and 8 %, or 4 out of 48. , saying it would be 0.50%.

“There is broad support for ending negative interest rate policy at the ECB, but they will take a very cautious approach to policy normalization, in light of significant macroeconomic uncertainty and concerns over a slowing growth,” said Jens Eisenschmidt, chief European economist at Morgan. Stanley.

“This will be the first time in over a decade that the ECB has raised rates – without the support of asset purchases – so taking smaller steps would allow the ECB to watch how markets react, with a possible fragmentation of financing conditions in the euro area is probably a major concern”.

The latest poll results still trail rate futures, which forecast a cumulative rate increase of 90 basis points for the rest of the year or between three and four 25 basis point moves.

Even that would leave the ECB far behind the US Federal Reserve, whose federal funds rate is currently expected to hover around 2.00-2.25% by the end of this year. ECILT/USA

However, the poll also found that the time window to raise rates was closing for the ECB, with a stable 30% median probability of a recession over the next 12 months, as the war in Ukraine pushes prices higher. rising energy and sapping consumers’ purchasing power.

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

On an annual basis, it is expected to grow by 2.7% this year, compared to 2.9% and 2.3% next year, as forecast last month.

The European Commission cut its growth forecast for the eurozone 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 a persistent spike in food and energy prices, have aggravated the cost of living crisis in the eurozone.

Prices are expected to rise 7.7% this quarter, more than three times the ECB’s 2.0% target and above last month’s forecast of 7.3%. It will gradually fade over the next few quarters, but the medians have not shown it on target until next year, the forecast horizon.

Asked about the impact of the cost of living crisis on growth, 19 out of 25 economists answered that it would be severe and two answered very severe. Only four said it would be sweet.

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

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

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

“While the current momentum triggers higher wage demands, companies remain cautious due to the weakening outlook,” Rabobank’s Bas van Geffen said.

“So anecdotal evidence also points to shorter wage deals so that there is flexibility to adjust next year, up or down, depending on inflation. So so far , it still seems to be mostly catch-up wage growth rather than a forecast.” .

Reuters poll: Eurozone economic outlookhttps://tmsnrt.rs/3Pm6tmJ

Reuters Poll – ECB Monetary Policy Outlookhttps://tmsnrt.rs/3wwInwV

(Reporting by Swathi Nair; Polling by Sarupya Ganguly and Milounee Purohit; Editing by Hugh Lawson)

((swathi.nair@thomsonreuters.com;))

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