ECB deposit rate to peak at 3.75% or higher as inflation stays sticky – Reuters poll

LONDON (Reuters) – The peak for European Central Bank interest rates will be much higher than thought only a month ago, according to economists polled by Reuters, and they added that stubbornly high inflation would push policymakers to be more aggressive.

Having flagged a 50 basis-point lift next week at the previous Governing Council meeting, ECB President Christine Lagarde doubled down on Sunday and said the increase was “very very likely”.

All 60 economists polled by Reuters March 7-9 believed her and said the banks deposit rate would rise 50 basis points to 3.00% on Thursday.

Medians in the poll showed the euro zones central bank adding 25 basis points at the following three meetings in May, June and July to give a terminal deposit rate of 3.75%, higher than the 3.25% peak expected in a February poll.

“A 50 basis-point rate hike next week looks like a done deal. The more heated debate at the ECB will be about the path for monetary policy beyond the March meeting,” said Carsten Brzeski at ING.

Markets are pricing in a peak of 4.00%.

U.S. Federal Reserve Chair Jerome Powell said on Tuesday the central bank watching over the worlds largest economy would likely need to raise interest rates more than expected in response to recent strong data and was prepared to move in larger steps.

But like ECB policymakers who have been arguing over just how high rates in the 20 countries using the euro need to go, economists were also divided.

While the median showed the deposit rate peaking at 3.75% it was a view held by only 19 of 60 economists surveyed. Twelve said it would be higher but 29 said it would be lower. The highest forecast was for 4.25%.

However, over 90% of respondents to an extra question, or 35 of 38, said the risks were the terminal rate would be higher than they expect.

Euro zone inflation – running at a higher-than-expected 8.5% in February and over four times the banks 2% goal – was predicted to drift down but remain above target until 2025 at least.

It will average 5.8% this year and 2.5% next, the poll showed.

“The real economy was stronger than expected at the start of the year, which implies less slack than expected, while core inflation was much higher,” said Luca Mezzomo at Intesa Sanpaolo.

Some economic readings have been better than feared, particularly through the winter, but the recovery is tentative and several indicators on Monday added to signs that even if a recession may have been avoided, no upturn is in sight.

There is now only a 34% chance of a recession within the coming year, the poll found, down from 50% in a January poll.

However, euro zone growth will be far from stellar with a 0.1% contraction pencilled in for this quarter followed by just a 0.1% expansion in the next. That will be followed by 0.2% growth in the following two quarters, according to forecasts barely changed from February.

Across this year as a whole the economy will expand 0.5% before growth accelerates to 1.2% in 2024.

(Other stories from the Reuters global economic poll:)