Global government bond yields have climbed sharply over the past weeks, reflecting higher inflation expectations and fiscal worries
International News via Reuters:
The European Central Bank is expected to hold its deposit rate at 2.50% this month but raise it by 25 basis points in December as inflation runs nearly double its 2% target, a Reuters poll found. Most economists polled had until recently thought the ECB was done.
Global government bond yields have climbed sharply over the past weeks, reflecting higher inflation expectations and fiscal worries. In Europe, investors have focused particularly on France.
Caught between high inflation — at 3.8% in September and very close to the ECB’s latest worst-case scenario — and concerns that rising yields could hurt growth, policymakers have recently argued for what ECB President Christine Lagarde called a “measured response”.
So far there has been scant evidence that higher energy prices caused by the US-Israeli war with Iran are spilling into other consumer prices, which would be a trigger for more ECB rate rises.
All but three of 73 economists polled October 5-8 expected the ECB to hold its 2.50% deposit rate on October 29, matching market pricing. The central bank raised rates for a second time this year in September.
However, a near-90% majority of economists, 64 of 73, now see another hike in December. This marks a clear reversal from the over 90% expecting rates on hold in last month’s survey.
“Given uncertainties, the ECB is likely to remain on the current quarterly adjustment path and that should get us to another hike in December… the main risk is there may actually be one more hike, maybe in March,” said Jens Eisenschmidt, chief Europe economist at Morgan Stanley.
A 58% majority, 40 of 70, saw the deposit rate peaking at 2.75%. But over a third, 24, expect it to be 3.00%, up from just two last month. Markets are currently pricing nearly three hikes by end-2027.
“I do not have a very strong conviction they go to 2.75% and stay there,” said Eisenschmidt.
“Our forecast is predicated on oil prices not increasing more and activity not accelerating further from here,” he said.
Inflation is expected to increase to 3.7% on average this quarter from 3.3% in the third quarter, higher than the 3.3% predicted last month, poll medians showed.
It will average 3.0% and 2.6% this year and next, both upgrades from the 2.9% and 2.3% predicted last month.
Meanwhile, signs of stronger economic activity led to an upward revision to the growth outlook. The euro zone economy is expected to expand 1.0% this year, up from 0.8% in the previous survey. Growth is seen at 1.2% in 2027 and at 1.3% in 2028.
ECB policymakers so far have argued against a rate rise at this month’s meeting, even though the Middle East and Russia-Ukraine wars show no signs of abating just as the weather turns colder and demand for energy rises. The bond market selloff has also lowered expectations of an immediate increase.
“A key argument against an October hike may be that market rates have increased meaningfully and are doing some of the job for the ECB,” said Anatoli Annenkov, senior European economist at Societe Generale.
(Other stories from the Reuters global economic poll)
Reporting by Indradip Ghosh; Polling by Mumal Rathore; Editing by Hari Kishan, Ross Finley and Xevi Fontdegloria
