According to a survey, the European Central Bank would hike its deposit rate in the second half of this year rather than waiting until 2023 as originally thought. In addition, their inflation estimates for this year are bigger than before.
The shift in perspective follows a shift in the ECB Governing Council’s concerns about consumer price inflation. It has been rising throughout much of the world and reached a new high of 5.1% in the euro zone’s 19 members in January compared to a year earlier.
Even so, the ECB would lag behind the Federal Reserve of the United States, which is projected to raise its federal funds rate from a range of 0% to 0.25% in March, probably by half a percentage point, with some banks anticipating as many as seven Fed rate hikes by the end of 2022. Only over a quarter of respondents (13 of 51) expect the deposit rate to rise this year; moreover, only around 20% (11 of 51) expect it to reach zero by 2022.
Inflation Smooths the Tightening
In a note to clients, HSBC’s chief European economist Simon Wells said, “Given the underlying inflation forecast and the risks the ECB is juggling, tightening is likely to be gradual and mild, and the extent of recent market swings still appear excessive to us.”
After that, growth should go up to 1.2% in Q2, before dropping to 1.0% in Q3 and 0.7% in Q4, respectively. These percentages were 0.5%, 1.1%, 0.9%, and 0.6% in the January survey. On average, the economy should increase 3.9% this year, down from 4.0% in last month’s survey. It should grow at a rate of 2.5% next year, up from the 2.4% forecasted in January.
Inflation in the eurozone should average 3.8% this year; it will fall below the ECB’s 2% objective to 1.8% in 2023, compared to the 3.0% and 1.7% forecast in January. Inflation should average 5.1% and 4.7% this quarter and next. It should be 3.9% and 2.7% for the third and fourth quarters, respectively.
