(Original title: Economists predict: the European Central Bank will raise interest rates twice before launching QT early next year)
Zhitong Finance APP learned that economists predict that the European Central Bank will raise interest rates twice to deal with unprecedented inflation, including a small rate hike of 50 basis points next week. According to analysts polled, the ECB will raise borrowing costs by the same amount at its February rate decision, meaning its deposit rate will peak at 2.5 percent. In addition, the analysts also expect the ECB to begin selling trillions of euros of crisis-era bond purchases sometime next quarter.
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It is understood that although the European Central Bank has introduced the most powerful round of monetary tightening in the history of the euro, more than half of the respondents said that the European Central Bank is still lagging behind in dealing with inflation. Even though price growth in the 19-member euro zone slowed in November for the first time since mid-2021, the market still sees prices staying elevated for some time as an escalating conflict between Russia and Ukraine exacerbates the continent’s energy crisis.
Currently, the ECB’s inflation rate is five times its 2% target. At the same time, the Fed also signaled a slowdown in rate hikes.
Ulrike Kastens, an economist at DWS Group, an asset management subsidiary of Deutsche Bank, said: “Inflationary pressures will persist, and at the same time, the ECB is expected to scale back interest rate hikes. The biggest challenge for the ECB is to convince the market that its real want to fight high inflation in a credible way.”
However, with the unwinding of nearly 5 trillion euros ($5.3 trillion) in debt, a process known as quantitative tightening, policymaking could become more fraught. More than 90 percent of economists surveyed believe that quantitative tightening will be achieved by allowing bonds to mature rather than actively selling them.
Eurozone economic outlook worsens
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Market inflation expectations for the next 12 months rose to 5.4% in the ECB’s latest monthly survey, remaining at 3% three years later. In addition, respondents to the survey expect euro area house prices to rise by 6.1% in 2023 and 2.2% in 2024, and that the euro area economy will contract during the winter before slowly returning to growth in the second quarter.
While money markets are pricing in an eventual rate closer to 3%, markets are still betting the ECB’s next move will be a 50 basis point hike. That would be a victory for the agency’s more moderate officials, and even some of their more radical colleagues have said they may support such an outcome.
“We wouldn’t be surprised if quantitative tightening kicks in earlier in exchange for a lower rate hike, say from 75 basis points to 50 basis points,” said Luca Mezzomo, an economist at Intesa Sanpaolo.
It is worth mentioning that only 4 of the 43 respondents expected a larger rate hike. Andrzej Szczepaniak of Nomura, one of them, said the underlying price pressures were “too great” to “celebrate peak inflation”.
ECB to shrink balance sheet
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According to the survey, economists expect the ECB’s asset purchase program (APP) to reduce holdings this year is expected to reach 180 billion euros. While the ECB’s Governing Council is due to unveil a broad-based quantitative tightening program next week, details on timing and size are unlikely.
Of those economists who expect the ECB to issue maturing bonds, about two-thirds envision an initial monthly cap of 10 billion to 30 billion euros to ensure the process does not disrupt markets. Most respondents expect the strategy to be revisited quarterly.
Nerijus Maciulis, chief economist at Swedbank, said: “In a fragile and heavily indebted euro area, quantitative tightening and interest rate hikes at the same time is a dangerous policy combination, especially when the euro area has not yet emerged from the energy crisis. Nine times out of ten, Monetary tightening will prove to be excessive and will lead to a rapid reversal.”