Leading investment banks are preparing for a significant rate hike in the euro zone.
(Photo: Reuters)
Some of Wall Street’s largest banks have revised upwards their forecasts for the European Central Bank’s interest rate decision. They now predict that higher inflation will prompt policymakers to react with even greater determination.
Economists at Goldman Sachs, JP Morgan and Bank of America now expect a 75 basis point hike at next week’s ECB Governing Council meeting. Some hawks in the 25-strong decision-making body have already brought this up as an option in the last few days. The money markets are now also pricing in this move.
The new forecasts follow the latest inflation data for the euro zone, which showed inflation at 9.1 percent on Wednesday. That’s more than economists had predicted and even further above the ECB’s 2 percent target. Core inflation, which excludes volatile items such as food and energy, also hit a new record high of 4.3 percent.
“There has been a growing number of policymakers at the ECB who prefer a more forceful response,” writes Greg Fuzesi, an economist at JP Morgan. The inflation data “will have encouraged them further. While the relative size of the various camps in the Governing Council after the summer break is difficult to gauge, we now suspect a 75 basis point hike is on the cards next week.”
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Goldman’s Sven Jari Stehn added that the economic indicators had also held up better than expected. “While that’s not a done deal – some members of the Governing Council have called for a steady pace of hikes – we think a 75 basis-point hike at the September meeting is more likely than another half-point step,” as set by the ECB last month, Stehn writes.
Goldman expects the deposit rate to rise to 1.75 percent by February. The trend is “in the direction of a higher final rate in the event of sustained inflationary pressure and stronger second-round effects”.
The economists at Bank of America (BofA) also expect a hike of 75 basis points, but still see “a very tight decision”. “The debate is very complex, but the combination of recent comments and the surprise rise in headline and especially core inflation in August means that a larger move than in July has now become slightly more likely,” they write in their report.
BofA expects the deposit rate to peak at 2.25 percent in June. Interest rate cuts will then start again in the second half of 2024.
More: Inflation in the euro area rises to a record level – Bundesbank boss calls for “major interest rate hike”