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ECB to raise deposit rate by 50 bps on Dec 15 as bloc enters winter recession

LONDON – The European Central Bank will take its deposit rate up by 50 basis points next week to 2.00%, despite the euro zone economy almost certainly being in recession, as it battles inflation running at five times its target, a Reuters poll found.

Since starting its inflation-fighting campaign in July, later than its peers, the ECB has been raising rates at its fastest pace on record and has already added 200 basis points to its key deposit rate, taking it to 1.50%.

According to the Dec. 5-8 Reuters poll, banks will earn 2.00% on deposits after policymakers meet on Thursday, the most since 2009. The refinancing rate will also move up by 50 basis points, to 2.50%.

The median view for the deposit rate was held by 51 of 60 economists surveyed, while two said the ECB would be more cautious and seven said it would be more aggressive.

When it last met in late October, the Governing Council topped up key rates by 75 basis points.

The U.S. Federal Reserve is also widely expected to downshift to a 50 basis point move following four consecutive 75 basis point increases at the conclusion of its policy meeting on Wednesday, the day before the ECB decision. ECILT/US

“The ECB‘s meeting next week is one of the few meetings at which the central bank will take a decision after the Federal Reserve and not before it. A slowing of the Fed’s rate hike pace could have an impact on the ECB as well,” said Carsten Brzeski at ING.

“The drop in headline inflation, as little as it says about the impact of the rate hikes so far, could at least take away some of the urgency to continue with jumbo rate hikes.”

Prices rose a much less than expected 10.0% last month on a year earlier, suggesting inflation across the 19 countries that use the euro might have peaked and bolstering the case for the ECB to slow its pace of increases.

Findings in the poll agreed and showed inflation would top out this quarter, at 10.3%, and then decline. But it was not seen at the Bank’s 2.0% target at any point on the polling horizon out to 2025.

ECB President Christine Lagarde suggested at the bank’s last meeting that it would set out a plan this month for reducing its bond holdings under the Asset Purchase Program.

The poll said it would reduce the stock by 175 billion euros next year, with forecasts ranging from 75 billion to 600 billion euros.

TURN ON THE HEAT

Policymakers face the dilemma of tightening policy just as the currency bloc heads into recession. Respondents in the poll gave a median 80% chance of one within a year.

Quarterly forecasts in the survey showed the economy would contract 0.3% this quarter and 0.4% next, meeting the technical definition of recession. It will then flatline in Q2 and expand 0.3% in the final two quarters of 2023.

Across this year the poll of 69 economists showed it would expand 3.2% before contracting 0.1% in 2023. In 2024 it will expand 1.3%.

When asked what sort of recession the bloc would endure, the vast majority of respondents said short and shallow, although 20 of 30 economists cautioned the risks to their growth forecasts were to the downside.

“We expect a short recession linked to the energy shock in Q4 2022 and Q1 2023, mitigated by government measures and followed by a moderate recovery from Q2,” said Luca Mezzomo at Intesa Sanpaolo.

Energy costs have soared following Russia’s invasion of Ukraine but many governments have introduced price caps and subsidies to support consumers as citizens head into winter and need to heat their homes. – Reuters

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