ECB to go big again with 75 bps rate hike on October 27

It has promised more hikes, and has begun a debate about unwinding its €3.3 trillion ($3.25 trillion) of bond purchases



Photos/Graphics: Reuters
Photos/Graphics: Reuters

By Reuters

Published: Wed 19 Oct 2022, 11:51 AM

The European Central Bank will go for another jumbo 75 basis points increase to its deposit and refinancing rates when it meets on October 27, as it tries to contain inflation running at five times its target, a Reuters poll found.

As in much of the world, eurozone inflation has soared, because skyrocketing energy prices and supply chains that are still healing from the coronavirus pandemic have taken a further hit from the Russia-Ukraine conflict.

The ECB targets inflation at 2 per cent, and yet, it was 10 per cent last month. It will average at a peak of 9.6 per cent this quarter (higher than thought last month), before gradually drifting down, but will not reach the target until late 2024, the poll found.

"Inflation is far too high. Rapid rate rises are needed. However, the ECB also needs to keep an eye on bond spreads, so more than 75bps seems unlikely," said Brian Martin at ANZ.

Much of the price pressure is coming from energy costs. With no end in sight to the Russia-Ukraine conflict, nearly 65 per cent of 34 respondents said that the cost of living in the eurozone would worsen to a variable extent. Only 12 said it would improve.

"The worst impact of the energy crisis on the household sector will develop in Q4 2022 and Q1 2023, when the demand for gas is seasonally higher," said Luca Mezzomo at Intesa Sanpaolo.

Reuters poll: Eurozone economic outlook
Reuters poll: Eurozone economic outlook

In the run-up to winter, forecasters are expecting the ECB to be more aggressive in tightening policy.

The bloc's central bank will take the deposit rate to 1.50 per cent and the refinancing rate to 2 per cent by next Thursday— a view held by an overwhelming majority of respondents in the October 12 - 18 Reuters poll of more than 60 economists.

Three-quarters of respondents to an additional question (27 of 36) said that the bank ought to choose a 75 basis point lift to the deposit rate, while two said it should go harder, with a 100 basis point increase. Only seven recommended 50 basis points.

Reuters poll: ECB monetary policy outlook
Reuters poll: ECB monetary policy outlook

Short and shallow?

The ECB's first increase did not come until July, when it added 50 basis points to all its rates, taking the deposit rate to zero — its first time not in negative territory since 2014 — and followed that up with a 75 basis point lift in September.

That was slow, compared to peers like the United States Federal Reserve, which has contributed to a fall in the euro to below parity to the US dollar.

By the year-end, the deposit and refinancing rates were forecast to be at 2 per cent and 2.50 per cent respectively compared to 1.25 per cent and 2 per cent predicted in a September poll.

The deposit rate was expected to reach a peak of 2.50 per cent next year and the refinancing rate 3.00 per cent: higher than the 1.50 per cent and 2 per cent highs given in September. The highest forecast was for them to reach 4 per cent and 4.50 per cent.

The ECB has promised more hikes, and has begun a debate about unwinding its €3.3 trillion ($3.25 trillion) of bond purchases — the legacy of its fight against deflation in the last decade.

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Two hawks on the ECB's Governing Council called last week for more hikes to fight runaway price rises. However, the central bank is also facing a recession in the bloc, and economists in the poll gave a median chance of 70 per cent of one within a year.

When asked what type of recession it would be, 22 of 46 respondents said that it would be short and shallow, while 15 said it would be long and shallow. Eight said it would be short and deep, and only one said it would be long and deep.

The economy was expected to grow 3 per cent this year, but flatline in 2023 before returning to growth in 2024 and expanding 1.5 per cent. In September's poll those forecasts were 2.9 per cent, 0.4 per cent and 1.6 per cent.


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