End of Negative ECB Rates in 2022 Is Bet for Traders, Economists

(Bloomberg) -- Traders and economists aligned their positions on euro-area monetary policy with both groups now forecasting the European Central Bank will bring an end to seven years of negative interest in 2022.

Money markets on Friday priced in about 50 basis points of tightening for December, suggesting the deposit rate will be lifted to zero from -0.5% at present. Analysts at Goldman Sachs Group Inc. and Deutsche Bank AG concurred, predicting two quarter-point moves over the coming months.

Economists had previously held a more dovish stance that was closer to guidance from the ECB itself for rates to remain at a record low into 2023. The trigger for the shift in expectations was ECB President Christine Lagarde's press conference on Thursday, where she declined to rule out a hike this year in the face of the fastest inflation since the euro was created.

It was a pivot that brings the ECB more in line with global peers at the Federal Reserve and the Bank of England. The latter delivered a quarter-point rate increase this week that would have been even bigger if Governor Andrew Bailey hadn't opposed it.

The ECB last raised rates in 2011.

“We now look for a substantially earlier ECB exit,” said Goldman Sachs analysts including Jari Stehn, who predict rate increases in September and December. Thursday's meeting “signaled that the Governing Council has little tolerance to look through the current high inflation rates.”

Such a timetable would mean an even sooner end to bond purchases than currently planned, given the ECB's stated intention to first cease that stimulus measure. Goldman and Deutsche Bank both anticipate debt-buying will end in June. Commerzbank, which has the same 2022 rate forecast, sees an end to purchases at the start of September.

ECB policy makers privately see a shift in formal guidance materializing as soon as next month, when they'll also reassess their bond-buying.

According to Lagarde, officials were concerned “across the board” after data this week showed another unexpected record reading in inflation. She spoke shortly after the Bank of England delivered a quarter-point rate increase that would have been even bigger if Governor Andrew Bailey hadn't opposed it.

Governing Council member Madis Muller said Friday that the ECB may review how quickly it ends bond-buying and is ready to adjust its current plans if necessary. Yet his French counterpart, Francois Villeroy de Galhau, cautioned against predicting when rates will be raised, saying officials retain their “full optionality on the decisions” set to be taken from March.

What Bloomberg Economics Says...

“Bloomberg Economics has brought forward its forecast for an interest rate increase by six months to December 2022. The Governing Council seems poised to change its messaging significantly at the March meeting.”

--David Powell and Maeva Cousin. For the full report, click here

While multiple economists are changing their projections after Lagarde's remarks, some still reckon the ECB will adopt a much more gradual approach. For example, Holger Schmieding at Berenberg brought forward his prediction for the first rate increase by three months to March 2023. 

ABN Amro economists have yet to be convinced that even that outcome will come to pass. They predict no change at all in rates through the ECB's forecast horizon, which currently runs until the end of 2024. 

“Although the chances of a rate hike this year have clearly gone up significantly, we are not changing our base case for now,” Nick Kounis and Aline Schuiling, both in Amsterdam at ABN Amro, said in a report to clients. “It is difficult for us to see the case to raise interest rates in the face of a supply-side shock when we are seeing few signs of second-round effects.”

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