The European Central Bank will take its deposit rate up by 50 basis points next week to 2.00%, despite the euro zone's economy almost certainly being in recession, as it battles inflation running at five times its target, according to a Reuters poll.
Since starting its inflation-fighting campaign in July, the European Central Bank has been raising rates at its fastest pace on record, and has added 200 basis points to its key deposit rate, taking it to 1.50%.
The banks will earn 2.00% on deposits after policymakers meet on Thursday, the most since 2009, according to the Dec. 5 -- 8 Reuters poll. The refinancing rate will increase by 50 basis points, to 2.50%.
The median view for the deposit rate was held by 51 of 60 economists surveyed, while two said the ECB would be more cautious and seven said it would be more aggressive.
The Governing Council topped key rates by 75 basis points when it met in late October.
The U.S. Federal ReserveFederal Reserve is expected to reduce its size to a 50 basis point move after four consecutive 75 basis point increases at the end of its policy meeting on Wednesday, the day before the ECB decision.
The ECB's meeting next week is one of the few meetings in which the central bank will make a decision after the Federal ReserveFederal Reserve and not before it. Carsten Brzeski said that a slowing of the Fed's rate hike pace could have an impact on the ECB as well as the Fed's rate hike pace.
The drop in headline inflation, as little as it says about the impact of the rate hikes so far, could take away some of the urgency to continue with jumbo rate hikes. The price of the euro might have peaked and bolstered the case for the European Central Bank to slow its pace of increases, as it went up a lot less than expected last month, suggesting that inflation across the 19 countries that use the euro might have peaked.
Inflation would top out this quarter, at 10.3%, and then decline, according to the results in the poll. It was not seen at the Bank's 2.0% target at any point on the polling horizon from 2025 to 2025.
The bank's last meeting suggested that it would set out a plan for reducing its bond holdings under the Asset Purchase Programme this month, according to ECB President Christine Lagarde.
The poll said it would reduce the stock by 175 billion euros next year, with forecasts ranging from 75 billion to 600 billion euros.
Policymakers face the dilemma of tightening policy just as the currency bloc heads into a recession. Respondents in the poll gave a median 80% chance of one within a year.
The economy would contract 0.3% this quarter and 0.4% next quarter, meeting the technical definition of recession, according to quarterly forecasts in the survey. It will be flatline in Q 2 and expand by 0.3% in the final two quarters of 2023.
The survey of 69 economists showed that it would expand by 3.2% this year before contracting 0.1% in 2023. It will expand by 1.3% in the year 2024.
When asked what kind of recession the bloc would endure, the vast majority of respondents said short and shallow, although 20 of 30 economists cautioned that the risks to their growth forecasts were to the downside.
We expect a short recession linked to the Q 4 2022 and Q 1 2023 energy shock, mitigated by government measures and followed by a moderate recovery from Q 2, said Luca Mezzomo at Intesa Sanpaolo.
After Russia invaded Ukraine, energy costs have gone up, and many governments have introduced price caps and subsidies to support consumers as they head into winter and need to heat their homes.