ECB Set for Final Rate Hike in December as Inflation Stays Elevated
ECB Policy Outlook and Inflation Risks
By Indradip Ghosh
December Rate Hike Expected
BENGALURU, Nov 12 (Reuters) - The European Central Bank will deliver a final deposit rate hike in this cycle next month, according to most economists polled by Reuters, although more than a third expect an additional increase in early 2027 as inflation hits double the 2% target.
Policymakers have almost locked in the December lift to pre-empt second-round effects from elevated energy costs that are hard to break once they set in.
Market and Economist Expectations
Resilient economic growth and inflation rising to a three-year high of 4% last month, alongside risks of a further pickup, have led markets to price in at least one more rate rise after December.
Most economists have yet to put it in their baseline forecasts. However, they are edging closer, warning against drawing too much comfort from a more than 20% slump in oil futures in recent weeks. Low natural gas storage levels ahead of winter are adding to inflation risks.
All 71 economists polled November 10-12 expected the ECB, which already acted in June and September, to hike its deposit rate to 2.75% in December.
Implications of the Rate Hike
If delivered, that would push the rate above the ECB's recent estimated neutral range of 1.75%-2.50%, a level considered neither stimulative nor restrictive for the economy.
"The December hike is almost on autopilot. It seems to me they made some sort of a deal in October whereby the conditions were probably ready to hike but they wanted to stick to the measured pace of hikes," Fabio Balboni, chief European economist at Wellington Management, said.
"March is still a possibility, I would say 50/50, because core will grind higher through to March and they might want to err on the side of caution and maybe do another insurance hike," he added.
But for now, Balboni expects December to be the last move unless energy prices flare up again.
Longer-Term Rate Projections
A 65% majority, 46 of 71, predicted the deposit rate will peak at 2.75% in December. But more than a third, 25, expect another increase, most likely in the first quarter of 2027.
Markets are currently pricing in two to three hikes by the end of next year.
Energy Prices and Inflation Uncertainty
"The downward move we have seen in energy prices is a bit misleading in terms of the risk picture. There's still plenty of uncertainty about whether we get peace in the Middle East and gas inventories continue to run at exceptionally low levels," Jan von Gerich, chief analyst at Nordea, said.
"If we get a cold winter, then we could easily see gas prices really spiking. It would be way too early for them to conclude at this point all is well ... It's better to go towards at least mildly restrictive if they think the upside inflation risks are the main threat here."
Inflation and Growth Forecasts
Economists raised their inflation forecasts from a month ago, seeing price growth staying around twice the ECB's target until at least Q2 2027. It will average 3.1% and 2.8% this year and next, up from 3.0% and 2.6% in the previous survey.
Core Inflation and Wage Pressures
Underlying price pressures are also expected to strengthen. Core inflation, at 2.2% in October, is forecast to average 2.6% this quarter and 2.8% next, higher than last month's predictions.
Wellington Management's Balboni sees core inflation rising further.
"It's unrealistic to expect there will not be any pickup in wages. I mean, we've had almost a 2% shock to real incomes, so I would expect, at least partially, unions to try to recoup some of that lost purchasing power," he said.
Growth Outlook
Growth was forecast at 1.1% and 1.3% this year and next, up from 1.0% and 1.2% in the October survey.
(Other stories from the Reuters global economic poll)
(Reporting by Indradip Ghosh; Polling by Mumal Rathore; Editing by Hari Kishan, Ross Finley and Andrew Heavens)