Economists believe the European Central Bank (ECB) will take stronger-than-expected action to rein in inflation even if the euro zone slips into recession, the latest survey shows.
Economists expect the ECB’s deposit rate to rise to 2.5 percent by March next year, up from 1.5 percent forecast in a previous survey. This means that the ECB will raise interest rates by 75 basis points on October 27 and another 50 basis points in December.
More than two-thirds of respondents said central bank action still lags the pace of rising inflation. Currently, the latest inflation rate in the euro area is five times the euro area’s 2% target.
The survey showed that most people believe that even if the economy of the 19 countries in the euro zone is in a downturn, the pace of the European Central Bank will not stop raising interest rates. Although the pace of interest rate hikes in Europe has been slower, the degree of ferocity in raising interest rates has not lost to the US Federal Reserve.
But after raising interest rates too fast, economists also worry that the rise will be too strong and will lead to further rate cuts. While one economist thinks a rate cut will come as soon as next July, the median economist’s forecast is in 2024.
Swedbank economist Nerijus Maciulis believes that euro zone inflation will remain at an uncomfortably high level in the coming months. In this case, the ECB is likely to over-tighten monetary policy.
ING economist Carsten Brzeski said that with a looming recession, recent market turmoil in the UK and mounting financial risks, the ECB will have to be very cautious. “It has to strike a balance between a determination to fight inflation and a premature turn.”
In addition to interest rates, the market is also concerned about when the European Central Bank will start quantitative tightening, starting to reduce its holdings of up to 5 trillion euros of bonds.
Most economists in the survey expect the ECB to start quantitative tightening in the third quarter of 2023.
