The ECB gave the message that it slowed the pace of tightening by raising the overnight deposit rate to 3.25% last Thursday.
According to the forecasts of economists of many banks, the ECB will increase interest rates by two more quarter points after this week’s rate hike.
According to Bloomberg’s research, many banks, such as Goldman Sachs, stated that the ECB will raise interest rates two more times by 25 basis points, bringing it to 3.75 percent. While ING and Commerzbank expect the rate to be reduced to 3.50 percent with a one-off interest rate hike, Danske Bank predicted that the ECB will increase the interest rate by 25 basis points three times to 4 percent.
The evaluations of the banks about the monetary policy to be followed by the ECB are as follows:
Renewed banking concerns in Europe could lead to an earlier end to the tightening cycle. “Given the resilient growth, wage regulations and sticky core inflation, we see risks leading towards a higher interest rate.”
We think that the tightening cycle will end in July with the deposit rate at 3.75%. Then, we expect the ECB to keep the interest rate constant until the second half of 2024. We then forecast it to cut rates by 100 basis points cumulatively over the next six months to return rates to a more neutral level.
We see risks in both directions. More financial market turbulence or a faster loss of momentum for the economy could soon stop the rate hike cycle.
The ECB is on track to reduce inflation to 2 percent in 2024-2025. We believe that the inflation environment will gradually improve over the summer so that the ECB will not raise interest rates further in September.
While the latest data has confirmed the underlying reality, inflationary pressure is tougher than expected. Weak loan growth and the latest results of the Bank Loan Survey point out that the rate hikes to date have left clear traces on the economy’s finances.
“We expect rate hikes to come to an end for the summer. However, this will not be enough to bring inflation back to 2 percent sustainably. This is because inflation tends to be stuck at high levels.
The ECB followed a slower path in reducing inflation. Lagarde repeated several times that this is a journey, not a destination. When we evaluate current inflation and growth, we guarantee that: We expect this tightening cycle to last a little longer but still end at 4 percent.