BENGALURU, May 17 ― The European Central Bank (ECB) is expected to raise the deposit rate for the first time in over a decade in July and bring it out of negative territory at its following meeting in September, despite a 30 per cent chance of recession within a year, a Reuters poll of economists showed.

With inflation hitting a multi-decade high of 7.5 per cent in April and almost every other major central bank having already raised interest rates, ECB President Christine Lagarde backed calls for an early rate hike by policymakers last week.

The bank is now expected to end its bond purchases programme in July and follow that with a 25 basis-point deposit rate hike a few weeks later, according to a majority of economists polled from May 10 to 16.

Until recently, forecasters were expecting the ECB to wait until the final quarter of the year to raise the deposit rate, currently at -0.50 per cent.

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Of the 46 of 48 economists who expect the deposit rate to rise in the third quarter, 26 said rates would rise by 50 basis points by the end of the period, implying quarter-point moves at both the July and September meetings.

Another 18 respondents said the deposit rate would only rise 25 basis points in Q3 and two said it would only climb 10 basis points to -0.40 per cent by the end of the quarter.

An even clearer majority expect rates to no longer be negative by the end of the year. About 90 per cent of economists, or 43 of 48, said the deposit rate would be 0 per cent or higher by then, with 44 per cent, or 21 of 48, saying it would be at 0.25 per cent by then and 8 per cent, or 4 of 48, saying it would be at 0.50 per cent.

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“There is widespread support for ending negative interest rate policy at the ECB, but they will take a very cautious approach to policy normalisation, in light of substantial macro uncertainty and concerns about a growth slowdown,” said Jens Eisenschmidt, chief European economist at Morgan Stanley.

“This will be the first time in over a decade that the ECB is lifting rates ― with no support from asset purchases ― so taking smaller steps would allow the ECB to observe the reaction in markets, with a possible fragmentation of financing conditions in the euro area likely a key concern”.

The latest poll results are still lagging rate futures, which are pricing in a cumulative 90 basis points of rate increases for the rest of the year or between three and four 25 basis-point moves.

Even that would leave the ECB well behind the US Federal Reserve, which is currently expected to have its federal funds rate around 2.00-2.25 per cent by the end of this year.

However, the poll also found the time window to raise rates is closing for the ECB, with a steady median 30 per cent probability of a recession in the next 12 months, as the war in Ukraine pushes energy prices higher and saps consumer spending power.

The bloc's economy was expected to grow 0.3 per cent, 0.5 per cent and 0.6 per cent, in the second, third and fourth quarters. This is a downgrade from 0.4 per cent, 0.6 per cent and 0.6 per cent predicted last month.

On an annual basis, it was expected to grow 2.7 per cent this year, down from 2.9 per cent and 2.3 per cent next, the same as predicted last month.

The European Commission cut its growth forecast for the euro zone this year to 2.7 per cent from 4.0 per cent projected in February, and upgraded its inflation forecasts to 6.0 per cent this year from 3.5 per cent.

Rising inflationary pressures, driven by a persistent surge in food and energy prices, have deepened the cost of living crisis in the euro zone.

Prices are set to rise 7.7 per cent this quarter, over three times the ECB's 2.0 per cent target and higher than the 7.3 per cent prediction given last month. It will ease gradually over coming quarters but medians did not show it at target through next year, the forecast horizon.

Asked what impact the cost of living crisis would have on growth, 19 of 25 economists said it would be severe and two said very severe. Only four said it would be mild.

It will be over six months before the crisis eases significantly according to 90 per cent of the respondents to another question.

Despite recession risks, unemployment in the single currency bloc is expected to remain near record low levels at 6.9 per cent and 6.8 per cent this year and next.

Meanwhile, average wage growth was expected to be 3.0 per cent this year, the poll median showed.

“While current dynamics are triggering higher wage demands, companies are still being cautious due to the weakening outlook,” said Bas van Geffen of Rabobank.

“Anecdotal evidence is therefore also pointing to shorter wage agreements so that there's flexibility to adjust next year, either higher or lower, depending on inflation. So, so far it still seems to be mostly catch-up wage growth rather than forward-looking”. ― Reuters