Swathi Nair

BENGALURU, (Reuters) – The European Central Bank will likely raise its deposit rate in July for the first-time in more than a decade and return it to positive territory at its next meeting in September, despite a 30% chance that the economy could fall into recession in the following year, according to a Reuters poll.

Christine Lagarde (ECB President) supported the calls for a quick rate rise last week, despite inflation reaching a high of 7.5% in April. This was despite almost all major central banks raising interest rates.

According to the majority of economists polled between May 10 and 16, it is expected that the bank will end its bond purchase programme in July, followed by a 25-basis-point increase in deposit rates a few more weeks later.

Forecasters expected that the ECB would delay raising the deposit interest rate until the last quarter of this year, as it is currently at -0.50%.

Out of 46 economists that expect deposit rates to increase in the third quarter of 2018, 26 predicted that they would rise by 50 basis point by the end. That implies quarter-point changes at both the September and July meetings.

Other 18 people surveyed said that the deposit rate will only increase 25 basis points during Q3, while two others said that it would rise 10 basis points to 0.400% at the end of quarter.

A larger majority of economists expect that rates will not be lower by the end the year. Around 90% (43 of 48 economists) said that by the end of this year, the deposit rates would have been at 0% or more. However, 44% (2 of 48), predicted it at 0.25%, while 8% (4 of 48), stated it at 0.50%.

Jens Eisenschmidt is chief European economist. He stated that “there is broad support to end negative interest rate policy by the ECB.” However, they will be taking a cautious approach towards policy normalisation in light of significant macro uncertainty and concerns over a slowdown in growth. Morgan Stanley (NYSE:).

“This will be the first time in over a decade that the ECB is lifting rates – with no support from asset purchases – so taking smaller steps would allow the ECB to observe the reaction in markets, with a possible fragmentation of financing conditions in the euro area likely a key concern”.

Recent polls show that rate futures continue to be lagging. They are pricing in rate hikes of between 3 and 4 basis points for the rest.

That would put the ECB in a far worse position than the U.S. Federal Reserve. Currently, the Federal Reserve expects to keep its federal funds rates at 2.00-2.25% through the end this year. [ECILT/US]

The poll showed that there is a closing window of opportunity for the ECB to increase rates. There’s a 30% chance of a recession over the next 12 month, due to rising energy costs and reducing consumer spending.

It was forecast that the economy of the bloc would expand 0.3% to 0.5% in each quarter. It is down from the 0.4%, 0.6%, and 0.6% forecasts last month.

It was predicted to increase 2.7% annually this year from 2.9% next and 2.3% next. This is the same prediction as last month.

The European Commission reduced the growth projections for the euro area this year to 2.7%, down from 4.0% forecasted in February. It also raised inflation forecasts this year to 6.0% from 3.5%.

The eurozone is facing an inflationary crisis that has been exacerbated by the persistent rise in food and energy costs.

In this quarter prices are expected to increase 7.7%, which is more than three times that of the ECB’s target of 2.0% and above the forecast of 7.3% last month. However, it is expected to ease over the next quarters. The medians for next year did not indicate that they would be at target.

When asked what the impact of the cost-of-living crisis on growth would be, 19 economists responded that it would have a severe effect. Two said that it would cause a severe recession. Four economists said that it would not be severe.

According to 90% of respondents to another questionnaire, it will take more than six months for the crisis to ease significantly.

Although there are risks of recession, the unemployment rate in the single currency bloc will remain at record levels of 6.9% to 6.8% next year.

According to the poll median, wage growth is expected to average 3.0% in this year.

Bas van Geffen from Rabobank stated that “while current dynamics may trigger higher wage demand, companies remain cautious due to the weakening outlook.”

Anecdotal evidence also points to the need for shorter wage agreements to allow flexibility to adapt next year to higher or lower inflation. This suggests that the trend is still primarily forward-looking rather than catch-up wage increase.

(For more stories, see the Reuters economic poll: