ECB to go big again with 75 bps rate hike on October 27
The European Central Bank will go for another jumbo 75 basis points increase to its deposit and refinancing rates when it meets on October 27, as it tries to contain inflation running at five times its target, a Reuters poll found.
As in much of the world, eurozone inflation has soared, because skyrocketing energy prices and supply chains that are still healing from the coronavirus pandemic have taken a further hit from the Russia-Ukraine conflict.
The ECB targets inflation at 2 per cent, and yet, it was 10 per cent last month. It will average at a peak of 9.6 per cent this quarter (higher than thought last month), before gradually drifting down, but will not reach the target until late 2024, the poll found.
“Inflation is far too high. Rapid rate rises are needed. However, the ECB also needs to keep an eye on bond spreads, so more than 75bps seems unlikely,” said Brian Martin at ANZ.
Much of the price pressure is coming from energy costs. With no end in sight to the Russia-Ukraine conflict, nearly 65 per cent of 34 respondents said that the cost of living in the eurozone would worsen to a variable extent. Only 12 said it would improve.
“The worst impact of the energy crisis on the household sector will develop in Q4 2022 and Q1 2023, when the demand for gas is seasonally higher,” said Luca Mezzomo at Intesa Sanpaolo.
In the run-up to winter, forecasters are expecting the ECB to be more aggressive in tightening policy.
The bloc’s central bank will take the deposit rate to 1.50 per cent and the refinancing rate to 2 per cent by next Thursday— a view held by an overwhelming majority of respondents in the October 12 – 18 Reuters poll of more than 60 economists.
Three-quarters of respondents to an additional question (27 of 36) said that the bank ought to choose a 75 basis point lift to the deposit rate, while two said it should go harder, with a 100 basis point increase. Only seven recommended 50 basis points.
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