Shrutee Sarkar

BENGALURU – European Central Bank will hike its deposit rates in the second quarter of 2018, not 2023 like previously thought, according to a Reuters poll. Economists also revised their inflation predictions for this year sharply.

The ECB Governing Council changed its view to address concerns about inflation. Inflation has been on the rise in many parts of the world, and it reached a new record in January at 5.1%. This was compared with a year ago.

ECB observers polled from February 7 to 14 predicted that the central banking would increase the deposit interest rate to –0.25% per year, based on a record low of -10.50%. But financial markets already anticipate a return towards zero.

That would put the ECB behind the U.S. Federal Reserve. The Fed is likely to increase its federal funds rates from 0%-0.25% range in March. Banks may expect as many as seven Fed rate hikes before 2022 ends.

Respondents to the poll were divided on the date of the first ECB rate increase. One economist expected a rise in the second quarter. 16 out 51 predicted a hike during Q3. 21 others anticipated a raise in Q4.

Thirty-five percent of the respondents (13 of 51), still expect no rate increase this year. However, only 20% of those surveyed, 11 of 51 expected it to be zero by 2022.

Simon Wells (HSBC’s chief European economist), wrote that tightening was likely to be slow and gradual given the underlying inflation outlook as well the risks the ECB faces.

Graphic: Reuters poll graphic on euro zone inflation and interest rates- https://fingfx.thomsonreuters.com/gfx/polling/jnpwelowbpw/Reuters%20poll%20graphic%20on%20euro%20zone%20inflation%20and%20interest%20rates.PNG

In the meantime, it is expected that the ECB will close its Pandemic Emergency Purchase Programme (PEP) in March. The ECB is widely expected to end its Pandemic Emergency Purchase Programme in March, according to more than three-quarters of those surveyed (31 out of 45).

The Omicron wave of COVID-19 infected Omicrons disrupted eurozone economic growth last quarter to 0.3%. The economy was expected to rebound to 0.4% this quarter, but it wasn’t.

So, growth was forecast to increase to 1.2% during Q2 and then slow to 1.0% (Q3 and Q4) respectively. These numbers were 0.5% and 1.1% respectively in the January poll.

On average, the economy is expected to grow by 3.9% this year, which was 4.0% according to last month’s survey. The economy was forecasted to grow 2.5% in 2013, slightly higher than the January prediction of 2.4%.

Inflation in the Euro zone was predicted to average 3.8% for this year. This is compared with 3.0% in January and 1.7% forecast in January.

Inflation was forecast to be 5.1% this quarter, and 4.7% the next. The forecasted inflation was 3.9% for Q3 and 2.7% respectively, in Q4 and Q4.

An analysis of like-for-like showed that more than 80% had adjusted their inflation forecasts by at least one fifth on average.

Surprisingly, more than 80% (or 34 out of 42) respondents believed that inflation would reach its peak in the current quarter.

According to RefinitivStarmine, Martin Weder is senior economist at ZKB and the best forecaster of the Euro zone’s economy according to Reuters polls.

(For additional stories about the Reuters global economy poll, click here