ECB's half-point rate hike next week 'a done deal'
Expected March It European The Basis Meetings, Bringing To In Basis Raise A To Is The A 5% Two Further 3 Deposit Peak Bank 50 Points Next 25 And The By At Central Of Rate Points
A half-point increase in interest rates next week appears to be "a done deal" and the European Central Bank will continue hiking to a plateau of 3.5% later this year, a leading economics group has predicted.
Capital Economics said the resilience of the eurozone economy which was once thought set to plunge into recession, means the ECB will push interest rates to higher-than-expected levels.
"With a 50 basis point rate hike at next week’s ECB meeting seemingly a done deal, the main point of interest next week will be any messaging about how much further rates will rise beyond that," Andrew Kenningham, chief Europe economist at Capital Economics, said in a commentary.
"We now think that the resilience of the economy and persistence of core inflation mean the bank will raise the deposit rate by a further 50 basis points in March and 25 basis points at the next two meetings, bringing it to a peak of 3.5%," he said.
The ECB will be slow to cut rates even as energy costs fall this year as it focuses on recent rises in so-called core inflation, which excludes energy, food, and alcohol, and "there is little reason for policymakers to become more dovish," according to Capital Economics.
"So although we are confident that headline and probably also core inflation will decline this year, the ECB is unlikely to start cutting interest rates until it sees the core rate coming back to target within its forecast horizon," Mr Kenningham said.
Hardline comments by ECB officials helped to push up eurozone government yields or interest rates. Eurozone yields rose in the session, but were still far from their recent highs.
Analysts said ECB president Christine Lagarde at next week's meeting might acknowledge the rate outlook is data-dependent and not reiterate that the peak or terminal rate market pricing is too low.
ECB policymakers such as Fabio Panetta said the central bank should only commit to a specific rate hike after February, while Joachim Nagel and Gabriel Makhlouf, the governor of the Central Bank of Ireland, argued earlier this week that rate increases might continue into the second quarter.
"Christine Lagarde and her colleagues have been very vocal in saying that they need to keep hiking rates," said Eoin Walsh, partner and portfolio manager at TwentyFour Asset Management. "I think this is what the market has been reacting to."
Germany's 10-year government bond yield, the eurozone's benchmark, rose four basis points to 2.2%. The Irish 10-year yield traded at 2.65%, up six basis points in the session.
"We think the market pricing of a terminal rate at around 3.3% has started to become more consistent with the current economic environment," said Flavio Carpenzano at Capital Group.
"But the ECB will need to keep rates at high levels for longer than markets are currently pricing, as expected wage rises across the euro area will prevent core inflation from falling rapidly towards the ECB target," he added.