Banks expect ECB rate at 0% by year-end after hawkish turn

By Yoruk Bahceli

LONDON (Reuters) -Investment banks brought forward their calls on European Central Bank interest rate hikes after a hawkish turn from the ECB that opened the door to the possibility of increased borrowing costs this year.

With euro zone inflation at a record high in January, ECB President Christine Lagarde declined to repeat her past comment that a 2022 rate hike was very unlikely at a news conference following the bank’s policy meeting on Thursday.

Sources told Reuters after the meeting that a decision to dial back stimulus now looked likely in March, starting with a faster-than-expected wind-down of the bank’s bond purchases, which according to ECB guidance need to end before rate hikes.

The updated calls brought banks somewhat more in line with market pricing. Adding to a sharp repricing on Thursday, money markets moved on Friday to price in a first, 10 basis-point (bps) rate rise by June 2022 and 50 bps worth of hikes by December.

Goldman Sachs analysts said on Friday that they expected the ECB to raise interest rates by 25 bps each in September and December, putting the bank’s policy rate at 0% by the end of the year.

Policymakers would decide in March to end the asset purchase programme by June and raise its deposit rate by 25 bps each in September and December, they forecast.

“Following large upside inflation surprises and yesterday’s hawkish policy pivot, we now look for a substantially earlier ECB exit,” strategists at the U.S. investment bank said in a note, where they also revised their inflation forecasts higher.

Deutsche Bank, BNP Paribas, BofA and Commerzbank also amended their forecasts late on Thursday to expect lift-off to start in September with two, 25 basis-point hikes by the end of the year, and expecting bond purchases to end in the second or third quarter.

Others, such as JPMorgan and Danske Bank, were slightly more cautious, expecting only one 25 bps rate hike in December.

ING and Citi economists also said they saw room for one rate hike this year.

Banks, however, diverged on how far the ECB could hike rates after a move this year.

After two hikes this year, Goldman Sachs expected a pause until June 2023, followed by hikes every six months until a terminal rate at 1.25% in June 2025.

BNP Paribas expected a further two hikes in 2023, with potential for further policy tightening thereafter. Deutsche Bank expected rates at 1% before end-2024.

Commerzbank expected rate hikes to pause next year and only resume in the second half of 2024.

(Reporting by Yoruk Bahceli and Saikat Chatterjee, additional reporting by Stefano Rebaudo and Vidya Ranganathan; Editing by John O’Donnell and Alex Richardson)