When the European Central Bank meets on October 27. It will attempt a further massive 75 basis point rise to its deposit & refinancing rates in an effort to rein in inflation. That is already running over five times its intended level.
The Russian invasion of Ukraine has further harmed supply chains still recovering from the coronavirus pandemic. Which has caused inflation in the euro zone to spike like it has in much of the rest of the world.
Although the ECB sets a 2.0% inflation target, last month’s rate was 10.0%. It will steadily decline but not reach the objective until late 2024, averaging at a top of 9.6% on to this quarter, more than anticipated last month.
“There is way too much inflation. There should be quick rate increases. More than 75bps appears probable, however the ECB should also monitor bond spreads, “Brian Martin said at ANZ.
Energy expenses are a major source of pricing pressure. Nearly 65% of 34 respondents believed the cost of living in the euro zone would deteriorate or worsen severely since there is no imminent conclusion to the Russia-Ukraine conflict. Only 12 people predicted improvement.
According to Luca Mezzomo of Intesa Sanpaolo. “The biggest effects of the energy crisis on the family sector will occur in Q4 2022 and Q1 2023. When the demand for gas is seasonally higher.”
Forecasters anticipate that the ECB will restrict policy more aggressively as winter approaches.
According to a resounding majority of respondents to a survey of more than 60 economists conducted between October 12 and 18. The central bank of the union would raise the deposit rate by 1.50% as well as the refinancing rate at 2.00% on next Thursday.
27 out of 36 responders to an additional note indicated the bank should opt to raise the deposit rate by 75 basis points. While two others said it should go even farther by raising the rate by 100 basis points. Seven out of twenty suggested 50 basis points.
How likely is a Recession?
The ECB didn’t raise key interest rate until July. When it raised 50 basis points to all of them, bringing the deposit rate at zero for the first time since 2014. And then increased them by another 75 basis points in September.
That was sluggish in comparison to competitors like the US Federal Reserve. Which caused the euro to drop below parity with the dollar.
In comparison to the 1.25% and 2.00% predictions made in September. Both deposit & refinancing rate were anticipated to be 2.00% and 2.50%, respectively, by year’s end.
In comparison to the 1.50% & 2.00% highs forecasted in September. The deposit rate was predicted to peak at 2.50% next year with the refinancing rate at 3.00%. The most optimistic prediction was that they would reach 4.00% – 4.50%.
The ECB has pledged additional rate increases and started a discussion about winding down their 3.3 trillion euro ($3.25 trillion) bond purchases. Which are the result of its decade-long battle against deflation.
To combat unchecked price increases, two hawks just on ECB’s Governing Board urged for more increases last week. However, the central bank is now also dealing with a recession with in bloc. With a 70% possibility of one occurring within a year according to the reports.
When asked what kind of recession it would be, 22 of the 46 respondents indicated it would be fast and shallow, while 15 said it would be longer and Shallow. Only one predicted a long and deep one, while eight predicted a short and deep one.
It was anticipated that the economy will rise by 3.0% this year, Flatten out in 2023. And then resume growth in 2024 by expanding 1.5%. These predictions in the September survey were 2.9%, 0.4%, and 1.6%.