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Market adjusts bets to end negative ECB rates in 2022

Traders and economists aligned their positions on eurozone monetary policy, with both groups now forecasting that the European Central Bank (ECB) will end seven years of negative interest in 2022.

Money markets priced around 50 basis points higher for December on Friday, suggesting the deposit rate will rise to zero from -0.5% today.

Analysts at Goldman Sachs Group Inc. and Deutsche Bank AG agreed on forecasting two quarter-point hikes in the coming months.

Economists had previously held a more dovish stance that was closer to the ECB’s own guidance of keeping rates at a record low until 2023.

The trigger for the change in expectations was the press conference by the president of the ECBChristine Lagarde, on Thursday, in which she refused to rule out an increase this year in the face of the fastest inflation since the creation of the euro.

It was a twist that puts the ECB more in line with its global peers the Federal Reserve and the Bank of England. The latter made a quarter-point rate increase this week that would have been even higher had Governor Andrew Bailey not objected.

The ECB it last raised rates in 2011.

We now expect a substantially earlier exit from the ECB.” analysts said Goldman Sachsamong them Jari Stehn, which foresee rate hikes in September and December. Thursday’s meeting “signaled that the Governing Council has little tolerance for ignoring current high inflation rates.”

This calendar would mean an end to bond purchases even earlier than expected, given the ECB’s declared intention to end this stimulus measure first.

Goldman Y Deutsche Bank They expect debt purchases to end in June. Commerzbankwhich has the same rate forecast for 2022, sees the end of purchases in early September.

The policy makers of ECB They privately see a change in formal guidance that could materialize next month, when they will also revisit their bond purchases.

According lagardeofficials were concernedin all fields” after this week’s data showed another unexpected record high inflation reading. Lagarde spoke shortly after the Bank of England raised interest rates by a quarter point, an increase that would have been even higher had Governor Andrew Bailey not objected.

madis muller member of the Governing Council, said on Friday that the ECB you can review how quickly you complete bond purchases and that you are willing to adjust your current plans if necessary.

However, his French counterpart, François Villeroy de Galhau, cautioned against predicting when rates will be raised, saying officials stand by their “full choice over decisions” that will be taken from March.

Analysts at Bloomberg David Powell Y Maeva Cousin they said that “Bloomberg Economics advanced its interest rate rise forecast by six months, until December 2022″. They added that “the Governing Council seems ready to significantly change its message at the March meeting.”

Although several economists are changing their projections after Lagarde’s comments, some still believe that the ECB will adopt a much more gradual approach. For example, Berenberg’s Holger Schmieding pushed forward his projection for the first rate hike in three months to March 2023.

ABN Amro economists are not yet convinced that even that will happen. They don’t see any change in rates over the ECB’s forecast horizon, which currently runs through the end of 2024.

Although the odds of a rate hike this year have increased significantly, we will not change our baseline assumption for now.”, write Nick Kounis and Aline Schuiling, both of ABN Amro in Amsterdam, in a report addressed to clients. “We find it difficult to see the case for raising interest rates in the face of a supply shock when we see few signs of second-round effects.”.

Source: Gestion

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