Goldman Sachs and BofA now see a giant 0.75% ECB rate hike

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Goldman Sachs and Bank of America revised their forecasts for the European Central Bank’s interest rates today, estimating that a new surge in inflation will prompt its officials to respond aggressively.

In particular, as Bloomberg reported, economists from both banks are now predicting that the ECB will raise interest rates by 75 basis points (0.75%) at next week’s meeting, a possibility they have begun to hint at in recent days some of the “hawks” of the Governing Council of the European Bank.

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On Goldman’s side, Sven Jari Stehn also pointed out that indicators of economic activity in the eurozone have been held at better levels than expected.

“While not locked in – with some ECB board members advocating a steadier rate hike – we believe a 75 basis point hike at the September meeting is more likely than another 50bps . as of July,” Stehn wrote in a note to the bank’s clients.

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Against this background, Goldman now expects the ECB to raise the deposit rate to 1.75% by February, with the possibility of a “higher final rate in case of more persistent inflationary pressures and strong spillovers”.

On her side Bank of Americaeconomists at the bank consider the forecast for interest rates to be extremely ambiguous, but they estimate that the new forecast for 75 basis points next week is even marginally correct.

“The debate is extremely complex, but the combination of the recent communications framework with the upward surprise in August inflation, and especially core inflation, means that a bigger move from July is now marginally more likely,” they wrote in their report.

BofA also expects the ECB’s deposit rate to peak at 2.25% in June, before the European bank begins rate cuts in the second half of 2024.

And the market is now seeing 75 bp growth. until October

At the same time, bets on derivatives tied to ECB interest rates have now reversed, with the market pricing in a 75 basis point hike on expectations that the Bank’s officials will step up its fight against inflation.

In particular, the markets estimate that the Bank will have raised its interest rates by 1.25% (125 bp) by October, which – given that there are two meetings in between – suggests a move to the 75 bp levels. and one in those of 50 m.v.

The new pricing shows how investors appear all the more willing to bet on giant ECB rate hikes early in the cycle.

It is noted that the ECB in July abandoned its initial guidance that it would proceed with an increase of 25 basis points, instead raising interest rates by 50 bp. (0.5%).

The new pricing today came in the wake of data showing further acceleration in eurozone inflation, which hit another record high of 9%.

Source: Capital

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