Wednesday, May 31, 2023

ECB will raise rates twice more and may continue if high inflation persists

BENGALURU (Reuters) – The European Central Bank will raise interest rates by 25 basis points at each of its next two meetings, according to economists polled by Reuters, many of whom also said the biggest risk was that rates would rise further. Future.

Several ECB monetary officials have reiterated that the central bank may have to raise interest rates for a longer period of time than before unless core inflation shows significant signs of slowing.

The ECB, which cut its rate by 25 basis points after a series of 75 and 50 basis point hikes at its May meeting, is likely to raise its rate again, according to a survey of 62 economists conducted between May 10 and 15. hopefully. quarter of one percentage point the next month, at 3.50%.

Although 20 of those surveyed predicted the ECB would end its tightening cycle, a majority, 42, believed the rate would rise to 3.75% in July, and five of them predicted it would rise to 4.00% in September. Will reach to.

Intermediaries indicated rates would remain at 3.75% until at least next April. Only one of them pointed to a cut of 25 basis points this year.

Ruben Segura said, “The messaging of various ECB officials … since the (May 4) meeting has been clearly tightening, and their survey on consumer expectations showed higher inflation expectations.” -Cayula, Europe economist at Bank of America.

“Unless something fundamental changes, we can only reiterate our view that — despite visible cracks in the outlook — two more 25 basis point hikes is the lower limit,” he said.

Although the ECB started its growth cycle later than other major central banks, it is now one of the few banks with higher growth going forward.

In contrast, the US Federal Reserve raised its benchmark overnight rate by 25 basis points earlier this month, signaling a pause in its tightening cycle.

However, ECB President Christine Lagarde said the ECB is “not dependent on the Fed” and will not stop as rates are not “tight enough” yet.

Underlying inflation

With inflation still running three times above the ECB’s 2% target, all but one of the respondents said the biggest risk was that the maximum interest rate could be higher than they expected.

Headline price pressures are not expected to ease until at least 2025 until the ECB’s 2% target. Core inflation is projected to average 5.5%, 5.0% and 3.9% and 2.7% in the second, third and fourth quarters, respectively. % in 2024.

“The path of core inflation is critical to the euro area’s economic and financial outlook, given its importance to the ECB’s monetary policy outlook,” said Ken Watret of S&P Global Market Intelligence.

In the short term, while the ECB signals it has “more ground to cover”, risks are to the upside. The growth cycle may continue into the third quarter, with core inflation still high, the unemployment rate at a record low and resistance to growth.

Recession seems far away, with a 40% chance of occurring within two years, giving the ECB room to raise rates and watch for the backward effects of its previous hikes.

The economies of the bloc of 20 are expected to grow by an average of 0.2% quarterly in the current quarter and 0.7% in the next two, before accelerating to 1.0% next year, with few changes from last month.

Nation World News Desk
Nation World News Desk
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