Shrutee Sarkar

BENGALURU (Reuters – The European Central Bank is expected to be the last central bank to increase interest rates following the COVID-19 epidemic, according to a Reuters poll. However, economists who believe the rate hike will come sooner than the current forecast of 2024 still think so.

Although the ECB stated that recent inflation increases are temporary, and indicated no tightening policy until they average around 2%, the markets see a rise in the coming year.

Bas van Geffen (senior macro strategist, Rabobank) stated that the ECB’s baseline projection is to keep the ECB on hold until 2024. This is based upon our assessment of inflation as transitory and the expectation the ECB will see it this way.”

“But, against the backdrop for higher inflation uncertainty this does skew risk to an earlier movement. We consider the current market price for a rate increase next year excessive.

The consensus of the Oct. 18-21 Reuters poll was that there would be no rate increase through 2023. However, nearly 90% of the economists who answered an additional question (35 of 40) said the risk is it arrives earlier than they expected.

Reuters poll graphic on euro zone economy and European Central Bank’s policy outlook: https://fingfx.thomsonreuters.com/gfx/polling/akpezajqlvr/MicrosoftTeams-image%20(45).png

ECB observers have a steady view, but a shift in market prices comes at a moment when other central banks including the U.S. Federal Reserve, the Bank of England and the Bank of England are closer to tightening their policies. [ECILT/US][ECILT/GB]

The central bank believes that inflation will stay under target in the medium-term and be temporary, as evidenced by the results of the most recent ECB survey.

The poll medians indicated that the ECB deposit rates remained unchanged at -0.50%, and that the refinancing rate remained at zero until 2023. An even smaller sampling that spanned more than 2 years revealed a deposit rate of -0.30% with a refi at zero until the end 2024.

Three-quarters (or 18%) of the economists who believed that rate increases would occur in the near future foresee at least one in 2024.

The ECB made the first steps towards removing the emergency assistance that had supported the economy in the coronavirus epidemic. The ECB announced that it would reduce monthly emergency bond purchases for this quarter and will end them completely by March 2022.

The median of 29 replies to a question about the amount of regular asset purchases (APP) after that date showed that there were 40 billion Euros worth of bond buying, compared with the current 20 billion monthly. 65 billion euro was the most optimistic forecast.

This effectively means that the ECB will transfer some of its emergency bond purchases into its regular program.

Many people who expected asset purchases would increase after March were more likely to predict an envelope that will last a longer time than fixed monthly volumes.

Nearly two thirds (27 out of 42) said there was greater concern for the Euro zone’s economy this year. Rest of the respondents said that inflation is still high.

After expanding 2.2% in Q3, the bloc’s economy is expected to expand 1.1% in this quarter, little different from September’s predictions of 1.2% and 2.2%. According to last month’s poll, it was predicted to grow at 4.4% next year. It will slow down to 2.1% 2023. In 2024, it was expected to decline to 1.6%.

For the three largest eurozone economies Germany, France, and Italy, growth and inflation expectations remained mostly stable.

Peter Vanden Houte (chief economist at ING) stated, “While COVID-19 seems to be under control now, there are other headwinds that slow the pace of recovery in the eurozone: Supply chain distortions still exist, while rising energy prices will weigh down growth.”

“Inflation continues surprise to the upside. This strengthens the tapering conversation within the ECB.”

The Euro zone inflation rate was predicted to average 2.3% in 2018, before slowing down to 1.8% 2022. That’s up from last month’s predictions of 1.6% and 2.1%, respectively.

The inflation rate rose from 3.4% to 3.4% in September to 3.5% last year. This quarter, it was expected to rise to 3.5%. Inflation was predicted to decrease next year and drop to 1.4% average in the fourth quarter 2022.

Jack Allen-Reynolds (capital Economics senior Europe economist) stated that while an unusually cold winter could put more downward pressure on gasoline prices, we believe that core and headline inflation will drop sharply to below 2% next year.

(Follow this link to see other stories in the Reuters global long term economic outlook polls package